Bracha Found. v. Warren Steel Holdings, L.L.C.

[Cite as Bracha Found. v. Warren Steel Holdings, L.L.C., 2017-Ohio-7557.]
IN THE COURT OF APPEALS
ELEVENTH APPELLATE DISTRICT
TRUMBULL COUNTY, OHIO
BRACHA FOUNDATION, et al., : OPINION
Plaintiffs-Appellants, :
CASE NO. 2015-T-0121
- vs - :
WARREN STEEL HOLDINGS, LLC. et al., :
Defendants-Appellees. :
Civil Appeal from the Trumbull County Court of Common Pleas, Case No. 2015 CV
01117.
JUDGMENT: Affirmed.
Michael R. Szolosi, Jr., Michael R. Szolosi, Jr., LLC, 2695 Andover Road, Upper
Arlington, OH 43221-3203; and James H. Power and Sean P. Barry, Holland & Knight
LLP, 31 West 52nd Street, New York, NY 10019 (For Plaintiffs-Appellants).
Patrick K. Wilson and Matthew M. Ries, Harrington, Hoppe & Mitchell, Ltd., 108 Main
Street, S.W., Suite 500, Warren, OH 44481 (For Defendants-Appellees, Warren Steel
Holdings, LLC and Mordechai Korf).
Richard M. Bain, Jeffrey C. Toole, and Heidi J. Milicic, Buckley King, L.P.A., 1400 Fifth
Third Center, 600 Superior Avenue, East, Cleveland, OH 44114-2652; and Bruce S.
Marks and Thomas C. Sullivan, Marks & Sokolov, LLC, 1835 Market Street, 28th Floor,
Philadelphia, PA 19103 (For Defendants-Appellees, Halliwel Assets, Inc. and Panikos
Symeou).
THOMAS R. WRIGHT, J.
{¶1} Appellants, Vadim Shulman, Bracha Foundation, and Hornbeam Corp.,
appeal the dismissal of all six claims in their two complaints for various reasons under
Civ.R. 12(B). They primarily contend that the trial court erred in holding that they lacked
standing to bring the underlying civil actions and that their claims cannot be maintained
in the state of Ohio under the internal affairs doctrines. Pursuant to the following legal
analysis, the dismissal determination is affirmed.
{¶2} Vadim Shulman is a citizen of Ukraine who resides in Monaco. He is the
sole beneficiary of Bracha Foundation, a Lichtenstein trust. He is also the sole owner of
Hornbeam, a Panamanian corporation.
{¶3} Appellees are Warren Steel Holdings, LLC, Halliwel Assets, Inc., Panikos
Symeou, and Mordechai Korf. Warren Steel Holdings is a Delaware corporation which
owns a steel plant/factory in Warren, Trumbull County, Ohio. Halliwel is a British Virgin
Islands (“BVI”) corporation which is presently the sole owner of Warren Steel Holdings.
Symeou is a Cypriot attorney who is the sole director of Halliwel. Korf, a resident of the
state of Florida, is the president of Warren Steel Holdings.
{¶4} In 2001, Shulman bought the Warren steel factory for approximately 28.5
million dollars. At the time of the purchase, the factory was not operational. However,
Shulman took steps to reopen the factory and produce steel, including the formation of
Warren Steel Holdings. At some point, Warren Steel Holdings became the sole owner
of the steel factory.
{¶5} By 2006, Shulman decided that additional capital was needed to make the
factory a profitable operation. As a result, he entered into a joint venture with two fellow
Ukrainian citizens, Igor Kolomoisky and Genady Bogolubov. The three men agreed that
each of them would invest 30 million dollars apiece in the factory. Thus, Shulman’s total
investment was 58.5 million dollars. According to Shulman, the three men also agreed
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that he would ultimately be compensated for his initial investment in the factory.
{¶6} As part of this transaction, Halliwel Assets was formed under the laws of
the British Virgin Islands. In April 2008, ownership of the steel factory was transferred
from Warren Steel Holdings to Halliwel. At the outset of its existence, Halliwel had only
three registered shareholders: Panikos Symeou, Marigold Trust, and Hornbeam Corp.
Each owned a one-third interest in Halliwel. In addition to being installed as the sole
director of that company, Symeou acted as trustee for Kolomoisky’s interest. Marigold
Trust represented Bogolubov’s interest. Shulman was Hornbeam’s sole owner.
{¶7} Through the ensuing years, Kolomoisky, Bogolubov, and Korf, as
president of Warren Steel Holdings, formed a number of other companies which
subsequently did business with Warren Steel. One of the separate entities was a steel
company located in Kentucky, of which Korf was also president. In these transactions,
the separate entity would either loan money to Warren Steel or purchase its products.
The terms of these deals always favored the separate companies owned by
Kolomoisky, Bogolubov, and Korf. Consequently, Warren Steel operated in the “red”
every year and its overall value began to decrease.
{¶8} In 2012, Shulman began to investigate the separate companies and their
transactions with Warren Steel. Ultimately, he concluded that Kolomoisky, Bogolubov,
and Korf were using the loans as a way to obtain a secured interest in Warren Steel’s
assets, so that they could subsequently take control of Warren Steel and deny him the
means of recouping his substantial investment.
{¶9} In August 2014, Hornbeam and Shulman received notice from Halliwel of
an emergency general meeting Halliwel would be conducting on August 8, 2014. The
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purpose of the meeting was to consider a proposed restructuring agreement and a 25
million dollar loan to Warren Steel from Optima Acquisitions LLC, one of the separate
entities owned by Kolomoisky, Bogolubov, and Korf. Initially, Symeou, as the sole
director of Halliwel, agreed to postpone the meeting and provide addition information to
Shulman regarding Warren Steel’s financial status. However, unbeknownst to
Shulman, Symeou held the meeting as scheduled and approved the loan and
restructuring agreement.
{¶10} On August 29, 2014, Hornbeam, the registered shareholder for Shulman,
filed an application before a BVI court to enjoin Halliwel from conducting the emergency
shareholders meeting. As part of its application, Hornbeam also requested that Halliwel
be liquidated. Approximately forty days later, the BVI court held an oral hearing on the
matter, at the outset of which it was revealed that the vote on the loan and restructuring
agreement had already been held. Hence, Hornbeam withdrew its injunction request.
In addition, the BVI court denied the liquidation application, concluding that Hornbeam
was trying to use the proceeding as a means of stopping the majority of shareholders
from exercising control over Halliwel’s affairs. Based upon this, the BVI court ordered
Hornbeam to pay $846,526 in costs and attorney fees. Hornbeam cannot proceed with
any new action before the BVI court before this amount is paid.
{¶11} In December 2014, Shulman took steps to transfer his one-third interest in
Halliwel from Hornbeam to Bracha Foundation. Since this transaction has never been
noted in Halliwel’s corporate books, though, Hornbeam is still the registered shareholder
of Shulman’s interest.
{¶12} After the completion of the BVI proceeding, Hornbeam brought four cases
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in federal district courts for discovery under 28 U.S.C. Sec. 1782. The cases were filed
in Ohio, New York, Delaware, and Florida. The purpose of the cases was to locate new
information concerning the separate companies owned by Kolomoisky, Bogolubov, and
Koft, and the transactions between those companies and Warren Steel.
{¶13} In June 2015, Shulman and Bracha Foundation filed their first complaint in
the Trumbull County Court of Common Pleas against Warren Steel Holdings, Halliwel,
Symeou, and Koft. Although Kolomoisky and Bogolubov were named as defendants in
the complaint, they were never served. In seeking recovery of the funds Shulman lost
as a consequence of the separate companies’ alleged acts, the complaint stated claims
sounding in fraud, conversion, and unjust enrichment. The complaint also had claims
seeking injunctive relief, appointment of a receiver, and inspection of corporate books.
{¶14} In conjunction with its initial complaint, Shulman and Bracha Foundation
moved the trial court for a temporary restraining order. After conducting an ex parte
hearing, the trial court granted the motion in part, enjoining the defendants from selling
Warren Steel Holdings or any of its assets to the separate companies owned by Koft,
Kolomoisky, and Bogolubov. The court further ordered the defendants to avoid a credit
bid of any loan made by any of the separate companies.
{¶15} Upon the completion of service, three of the four defendants, Warren Steel
Holdings, Halliwel, and Symeou, immediately moved to vacate the TRO on the grounds
that Shulman and Bracha Foundation lacked standing to maintain the case. The motion
was referred to a magistrate for review. After holding a hearing, the magistrate issued a
decision recommending that the motion to vacate be granted and the action dismissed
in its entirety. The magistrate found that Shulman and Bracha Foundation did not have
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the requisite standing because any dispute regarding who or what entity was the proper
shareholder of the Halliwel interest had to be determined by a BVI court.
{¶16} In addition to objecting to the magistrate’s decision, Shulman and Bracha
Foundation filed an amended complaint, seeking to add Hornbeam as a third plaintiff in
the action. The basic allegations of the complaint and the nature of the six claims were
not altered. Hornbeam then instituted a separate action before the trial court, asserting
the identical six claims based upon the identical allegations. The trial court immediately
consolidated the two cases for all purposes.
{¶17} Before the trial court could proceed on the objections to the magistrate’s
decision, all four defendants/appellees, Warren Steel Holdings, Halliwel, Symeou, and
Koft, moved to dismiss the complaints under both cases. Besides the issue of standing,
they contended that Shulman, Bracha Foundation, and Hornbeam, appellants, could not
assert their claims in Ohio under the internal affairs doctrine; that appellants had failed
to satisfy BVI law in instituting the actions; and that Ohio was not a convenient forum for
litigating the actions. In essence, appellees argued that appellants could only maintain
their claims against them in a BVI court.
{¶18} After appellants had been given the opportunity to respond to all pending
motions, the trial court issued its final judgment dismissing all six claims for relief in both
complaints. In addition to upholding the magistrate’s analysis regarding Shulman’s and
Bracha Foundation’s standing, the court further held that Hornbeam lacked standing to
bring the case because it did not have a license to transact business in Ohio. The court
also accepted appellees’ arguments as to the application of the internal affairs doctrine
and whether Ohio was the most convenient forum.
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{¶19} In appealing the dismissal of the complaints in both cases, appellants set
forth five assignments for review:
{¶20} “[1.] The trial court erred in holding that Plaintiffs lack standing.
{¶21} “[2.] The trial court erred in dismissing these actions pursuant to the
internal affairs doctrine.
{¶22} “[3.] The trial court erred in concluding that Plaintiffs’ claims are derivative
under Ohio law, and therefore required a verified Complaint.
{¶23} “[4.] The trial court erred in dismissing these actions on grounds of forum
non conveniens.
{¶24} “[5.] To the extent the trial court summarily incorporated the Defendants’
alternative arguments for dismissal, it erred.”
{¶25} Under their first assignment, appellants contend that the trial court erred
in not concluding that at least one of them had standing to maintain the underlying case
against appellees. As noted above, in relation to Shulman and Bracha Foundation, the
trial court held that they lacked standing because they were not registered shareholders
of Halliwel. As to Hornbeam, the court found that it could not bring the case because it
was not licensed to transact business in Ohio. For the following reasons, it is necessary
to only address the merits of the trial court’s analysis regarding Hornbeam.
{¶26} R.C. 1703.03 provides that unless a statutory exception applies, a foreign
corporation cannot “transact business” in Ohio unless it is the present holder of a valid
license to do so, as issued by the secretary of state. As to the effect of not having such
a license, R.C. 1703.29(A) states, in pertinent part:
{¶27} “The failure of any corporation to obtain a license * * * does not affect the
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validity of any contract with such corporation, but no foreign corporation which should
have obtained such license shall maintain any action in any court until it has obtained
such license.”
{¶28} Under this provision, if a foreign corporation is transacting business in our
state, it cannot file a legal action in an Ohio court unless it has a valid license to engage
in that business. However, if a foreign corporation is not transacting business within our
borders, the lack of a license does not preclude it from maintaining a legal action in a
state court. Bosl v. First Fin. Inv. Fund I, 8th Dist. Cuyahoga No. 95464, 2011-Ohio-
1938, ¶15-16.
{¶29} In applying R.C. 1702.29(A), the trial court held that Hornbeam could not
bring the underlying case because it had been transacting business in Ohio without a
valid license from the secretary of state. This holding was predicated upon the following
logic:
{¶30} “However, Plaintiff Hornbeam claims that it is not transacting business in
Ohio. It would be inapposite to sustain Plaintiff’s contention that the Defendants,
especially Defendant Halliwel, are transacting business in the State of Ohio while
simultaneously accepting Plaintiffs’ contention that Hornbeam is not transacting
business in Ohio.”
{¶31} Given the allegations in appellants’ complaints, the trial court’s analysis of
this issue is flawed. There is no dispute that Halliwel is the sole owner of Warren Steel
Holdings, which in turn is the sole owner of the steel factory in Warren, Ohio. Since the
operation of a steel factory within the state constitutes a business, Halliwel is obviously
transacting business within the state. On the other hand, Hornbeam’s sole function is to
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act as the shareholder of Shulman’s interest in Halliwel. As that limited function has no
connection to the state of Ohio, appellants’ allegations only support the conclusion that
Hornbeam does not transact business in Ohio.
{¶32} Given this conclusion, Hornbeam could maintain a legal action in an Ohio
court notwithstanding the fact that it did not have a valid license to transact business in
this state. Moreover, since Hornbeam could maintain the underlying action on its own,
the trial court erred in concluding that the case could be dismissed in its entirety solely
on the grounds of standing. To this extent, appellants’ first assignment has merit. But,
any error the trial court made as to the issue of standing is not prejudicial because there
was another valid basis for the decision to dismiss.
{¶33} Under their second assignment, appellants assert the trial court erred in
concluding that they could not proceed on their two complaints because their claims
were barred under BVI law. In this aspect of its analysis, the court first held that, since
Halliwel was incorporated under BVI law, the internal affairs doctrine mandated that BVI
law be followed in determining the viability of the claims. Based upon this, the trial court
further concluded that, regardless of whether appellants’ claim of fraud, conversion, and
unjust enrichment were considered “derivative” or “direct” in nature, they did not comply
with certain statutory requirements for maintaining those claims.
{¶34} Appellants challenge the trial court’s “internal affairs” analysis. First, they
submit that the doctrine has no applications in this case because their claims are based
upon conduct that occurred in Ohio. Second, appellants argue that Ohio law should be
followed because our state has a stronger “interest” in the outcome of the case than the
British Virgin Islands.
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{¶35} “The doctrine of internal affairs is a conflict of laws principle which
recognizes the policy that a state should have authority to regulate the internal affairs of
its own corporations. State ex rel. Petro v. Gold, 166 Ohio App. 3d 371, 2006-Ohio-943,
850 N.E.2d 1218, ¶47 (10th Dist.). As a matter of comity and a need for uniformity of
decisions, the courts of one state may not ordinarily interfere with the prerogative of the
state in which a corporation is created or domiciled to govern the internal operation of
that entity. Relief Assn. of the Union Works v. Equitable Life Assur. Soc., 140 Ohio St.
68, 42 N.E.2d 653 (1942), paragraph one of the syllabus; 2 Restatement of the Law 2d,
Conflict of Laws, Section 302, Comment b (1971).
{¶36} “Ordinarily, the law of the state of incorporation determines issues relating
to the internal affairs of the corporation. State ex rel. Petro at ¶47, citing First Natl. City
Bank v. Banco Para el Comercio Exterior de Cuba, 462 U.S. 611, 621, 103 S. Ct. 2591,
77 L. Ed. 46 (1983). Those matters encompassed in a corporation’s ‘internal affairs’ are
primarily those things involved in a corporation’s relations with its shareholders: ‘original
incorporation, the election or appointment of directors and officers, the adoption of by-
laws, the issuance of corporate shares * * * the reclassification of shares and the
purchase and redemption of the corporation of outstanding shares of its own stock.’ 2
Restatement of the Law 2d, Conflict of Laws, Section 302, Comment e.” Newcomer v.
Newcomer, 6th Dist. Lucas No. L-11-1183, 2013-Ohio-5627, ¶57-58.
{¶37} As appellants correctly note, the internal affairs doctrine does not apply to
bar a claim against a foreign corporation when the claim is predicated upon a violation
of Ohio law. See, e.g., State ex rel. Corrigan v. Great Northern-Chan Restaurant, Inc.,
3 Ohio App. 3d 355, 357, 445 N.E.2d 732 (8th Dist.1982). Further, the doctrine does not
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apply to claims involving the rights of third parties, such as creditors, who are external to
the corporation. State ex rel. Petro v. Gold, 166 Ohio App. 3d 371, 2006-Ohio-943, 850
N.E.2d 1218, ¶47 (10th Dist.).
{¶38} In asserting that the internal affairs doctrine has no application to their six
claims, appellants argue that their claims allege violations of Ohio law because they are
based upon conduct occurring within the boundaries of this state. Yet, the complaints
show that appellants’ three primary claims, for fraud, conversion, and unjust enrichment,
were predicated upon the basic allegation that appellees had conspired to decrease the
value of Warren Steel, thereby lowering the value of Shulman’s interest in Halliwel. The
decrease in value occurred as a result of a series of loan agreements and the sale of
products that were advantageous to the companies owned by Kolomoisky, Bogolubov,
and Koft. In essence, appellants’ complaints assert that Koft and the other two Halliwel
shareholders were engaged in self-dealing, and that, after the remaining assets of the
steel company were either sold or liquidated, they would be able to recoup their initial
investments while Shulman would be left with no remedy.
{¶39} However, in making this basic assertion, appellants have not alleged that
the loan agreements or product contracts were primarily negotiated or executed in Ohio.
Although the alleged agreements and contracts may have had a direct effect upon the
steel company’s financial status, there is no specific allegation that any aspect of the
conspiracy occurred within this state. Thus, the complaints are insufficient to establish
that appellants’ claims are predicated upon conduct taking place in Ohio.
{¶40} Appellants further maintain that their complaints state claims in tort and
quasi-contract, under which they are “creditors” seeking reimbursement. According to
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them, the internal affairs doctrine does not apply because this case does not relate to
the internal administration of Halliwel as a corporation. But, in light of the allegations in
the complaints, this assertion mischaracterizes the relationship between appellants and
Halliwel. There is no dispute under the allegations that Hornbeam, on behalf of
Shulman, is a shareholder in Halliwel, as are Kolomoisky and Bogolubov, and all six
claims are predicated upon that relationship. To this extent, appellants’ claims can only
be characterized as shareholder-based causes of action, either direct or derivative.
{¶41} As separate argument, appellants submit that Ohio law should be applied
over BVI law because the litigation has significant connections to this state. They note
that the only connection the case has to BVI is that Halliwel was formed there.
{¶42} In support, appellants point to the Ohio Supreme Court’s decision in Gries
Sports Enterprises, Inc. v. Modell, 15 Ohio St. 3d 284, 473 N.E.2d 1288 (1984). Gries
Sports involved the enforcement of a voting agreement between two shareholders of a
Delaware corporation. The agreement had multiple terms, including the requirement
that two directors nominated by the minority shareholder must be elected to the board.
After the agreement existed for over ten years, the majority shareholder refused to vote
his stock to elect the minority directors, claiming that the agreement was no longer
enforceable because Delaware law limited the duration of a shareholders’ agreement to
ten years. The trial court held that Ohio law was controlling as to the enforcement of the
agreement, but the appellate court concluded that Delaware law applied.
{¶43} At the outset of its analysis, the Gries Sports court noted that the voting
agreement in that case was analogous to a voting trust. Id. at 287. Quoting Section
305 of 2 Restatement of the Law 2d, Conflict of Laws, the Supreme Court further noted
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that, although a voting trust was generally governed by the law of the state where the
corporation was formed, one exception has been recognized: the law of another state
will be controlling if that state has a significant relationship with both the corporation and
the shareholders. Id. The Supreme Court then held that the exception was applicable
to the voting agreement:
{¶44} “In the case at bar, the place of contracting was Ohio, the place of
negotiation was Ohio, the place of performance was Ohio, the location of the subject
matter of contract was Ohio, the place of incorporation was Delaware, and the place of
business of the parties was Ohio. The conclusion is inescapable that Ohio ‘bears the
most significant relationship to the contract.’” (Citation omitted). Id.
{¶45} In appellants’ complaints, reference is made to an agreement between
Shulman, Kolomoisky, and Bogolubov, under which they agreed to consult with each
other regarding any major decisions and to take steps to ensure that each shareholder
ultimately recovered his initial investment. However, there is nothing in the allegations
indicating that their agreement was negotiated or consummated in Ohio. Furthermore,
given that the cited agreement concerned the operation of Halliwel, the allegations are
insufficient to show that Ohio is where the agreement was performed or where the
subject matter of the agreement is located. Unlike the facts in Gries Sports, the dispute
in this case is between foreign shareholders in a foreign corporation. Therefore, Gries
Sports is not controlling.
{¶46} Although it is true that Halliwel’s sole asset is located in Ohio and the steel
factory employs Ohio workers and pays Ohio taxes, appellants brought this action to
recover funds which, according to them, have been wrongfully taken by the two other
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shareholders, both of whom have no clear connection to the United States, let alone the
state of Ohio. Hence, the action’s connections to Ohio do not predominate to such an
obvious extent that there exists an extraordinary circumstance warranting the
application of Ohio law.
{¶47} Taken as a whole, appellants’ allegations indicate that the underlying case
involves a dispute between shareholders of a corporation regarding the proper action to
be taken to preserve the value of the corporate assets. Such a dispute directly pertains
to the internal affairs of Halliwel. Accordingly, the trial court did not err in holding that
the viability of appellants’ claims must be analyzed under the laws of the British Virgin
Islands, the site of Halliwel’s incorporation.
{¶48} Under their first claim, appellants sought an accounting of Warren Steel’s
corporate books. In Relief Assn. of Union Works v. Equitable Life Assur. Soc., 140 Ohio
St. 68, 79, 42 N.E.2d 653 (1942), the Ohio Supreme Court expressly stated that, under
the internal affairs doctrine, an Ohio court lacks jurisdiction to order an accounting of a
foreign corporation’s corporate books. See, also, 2 Restatement of the law 2d, Conflict
of Laws, Section 302, (1971), Comment a, which provides that the laws of the state of
incorporation governs a shareholder’s right to examine the corporate books, unless
another state has a more significant relationship to the subject matter and the parties.
{¶49} Citing Hinton v. B.F. Goodrich Co., 9th Dist Summit No. 7624, 1975 WL
180531 (May 7, 1975), appellants assert that an Ohio trial court has the authority to
order an inspection of the books and records of a foreign corporation if they are located
within the state. But, given the nature of appellants’ allegations in their complaints, this
rule would only apply if Halliwel’s books and records were located in Ohio. Appellants
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did not allege that they were. Appellants also cite Danziger v. Luse, 103 Ohio St. 3d
337, 2004-Ohio-5227, 815 N.E.2d 658, for the proposition that a shareholder in a parent
corporation has a common law right to inspect the books of a wholly-owned subsidiary.
But this rule has no application in this case because the trial court has no authority to
order an inspection of the parent corporation’s books. Since Warren Steel is a wholly-
owned subsidiary of Halliwel, no relief could be granted to appellants under their first
claim.
{¶50} Appellants’ next three claims constitute the crux of their complaints, under
which they sought damages on the bases of fraud, conversion, and unjust enrichment.
In disposing of these particular claims, the trial court held that under BVI law, they were
either shareholder derivative claims or “unfair prejudice” claims in which a shareholder
could assert a “direct” right to recover. The court further concluded that, regardless of
which way the three claims were characterized, appellant failed to follow the necessary
statutory procedure for maintaining such claims.
{¶51} Appellants state that their damages claims could have been characterized
in other ways under BVI law; according to them, they were not limited to only derivative
or unfair prejudice claims. However, in making this assertion, they do not reference any
other of cause of action. Furthermore, given the nature of appellants’ factual
allegations, there is no dispute that the action was brought to recoup for Halliwel the
funds that had supposedly been taken by Kolomoisky, Bogolubov, and Korf through
self-dealing. To this extent, appellants’ alleged injury was identical to the injury
sustained by Halliwel and Warren Steel. Thus, appellants’ three conspiracy claims,
based upon allegations of fraud, conversion, and unjust enrichment, are properly
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characterized as shareholder derivative claims. See Crosby v. Beam, 47 Ohio St. 3d
105, 107, 548 N.E.2d 217 (1989). In support of their motions to dismiss, appellees
submitted the affidavit of a legal expert on BVI law, who averred that the three damages
claims could only be characterized under BVI law as shareholder derivative or unfair
prejudice claims.
{¶52} Regarding shareholder derivative claims, section 184C of the British Virgin
Islands Business Companies Act of 2004 provides that a shareholder who intends to
assert such a claim must first file an application with “the Court” for leave to do so. The
term “the Court” is defined under section 2 of the Act as the High Court of the Eastern
Caribbean Supreme Court. Therefore, a party lacks standing to bring a derivative suit
until leave is granted by proper court. Vaughn v. LJ International, Inc., 174 Cal. App. 4th
213, 94 Cal Rptr.3d 166 (2d Dist.2009). In this case, appellants did not allege that they
had obtained the required leave to pursue this type of claim.
{¶53} As to unfair prejudice claims, section 184I of the 2004 Act states: “(1) A
member of a company who considers that the affairs of the company have been, are
being or are likely to be, conducted in a manner that is, or any act or acts of the
company have been, or are, likely to be oppressive, unfairly discriminatory, or unfairly
prejudicial to him in that capacity, may apply to the Court for an order under this
section.” Citing the use of the word “may” in the provision, appellants contend that an
unfair prejudice can be brought in any court. However, such an interpretation conflicts
with the inclusion of the phrase “the Court”, as that phrase is defined in the Act. Thus,
as appellees’ legal expert averred, an unfair prejudice claim can only be brought before
the BVI High Court. For this reason, the trial court did not err in concluding that it lacked
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the authority to proceed on any of appellants’ three damages claims.
{¶54} Appellants’ complaints raised two additional claims, requesting injunctive
relief and the appointment of a receiver. In contesting the trial court’s analysis, they
have not asserted separate arguments concerning the dismissal of those claims. Given
that their right to relief under those claims was contingent upon the merits of the three
damages claims, appellants could not have established a set of facts under which they
would have been entitled to injunctive relief or a receiver. Accordingly, as the trial court
correctly held that appellants’ six claims in both complaints were barred under the
internal affairs doctrine, their second assignment lacks merit.
{¶55} In the remainder of its judgment, the trial court gave two separate reasons
justifying the dismissal of both cases: (1) the three damages claims would be barred as
shareholder derivative claims under Ohio law because the complaints were not verified;
and (2) appellants should have brought the case in the British Virgin Islands under the
doctrine of forum non conveniens. Given our analysis under the second assignment,
the merits of the other two bases are moot. Therefore, pursuant to App.R. 12(A)(1)(c),
appellants’ final three assignments need not be addressed.
{¶56} The judgment of the trial court is affirmed.
DIANE V. GRENDELL, J., concurs in judgment only,
COLLEEN MARY O’TOOLE, J., dissents with a Dissenting Opinion.
____________________
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COLLEEN MARY O’TOOLE, J., dissents with a Dissenting Opinion.
{¶57} I respectfully dissent.
{¶58} Questions of law are reviewed de novo. Reagan v. Sturges, 11th Dist.
Portage No. 2016-P-0001, 2016-Ohio-8226, ¶12.
{¶59} This writer’s review of the record and applicable case law leads me to
conclude that appellants have standing to bring these actions. Appellants do not
transact business in Ohio. Because of this fact, the trial court stressed that appellants
lacked standing to bring these actions since they do not have an Ohio business license.
However, if a foreign corporation is not transacting business within Ohio, the lack of a
license does not preclude it from maintaining a legal action in a state court. Bosi v. First
Fin. Inv. Fund I, 8th Dist. Cuyahoga No. 95464, 2011-Ohio-1938, ¶15-16. Thus, R.C.
1703.29(A) does not bar this action.
{¶60} It is obvious that appellee Halliwel is transacting business within Ohio. On
the grounds of standing, this writer finds, and the majority acknowledges, that appellant
Hornbeam could maintain the underlying action on its own. Because Hornbeam has
standing, the court has jurisdiction regardless of whether any other plaintiff has
standing. Notwithstanding this fact, appellants Bracha and Shulman also have standing
as beneficial owners of Halliwel. See, e.g., Smith v. Koehler, 91 Ohio App. 3d 337 (3rd
Dist.1992); Wheeler v. Johnson, 2d Dist. Montgomery No. 22178, 2008-Ohio-2599.
{¶61} Regarding books and records, a plaintiff may bring such a claim in Ohio to
inspect a foreign corporation’s books and records if they are located in Ohio. See, e.g.,
Hinton v. B.F. Goodrich Co., 9th Dist. Summit No. 7624, 1975 WL 180531 (May 7,
1975). Shareholders are entitled to inspect the records of a wholly-owned subsidiary of
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the corporation in which they own stock where, as in this matter, the parent corporation
so controls and dominates the subsidiary that the separate corporate existence of the
subsidiary should be disregarded. See, e.g., Danzinger v. Luse, 103 Ohio St. 3d 337,
2004-Ohio-5227 (nothing about the reasoning suggests the law would be different if the
parent company is foreign); Mir v. Birjandi, 2d Dist. Greene Nos. 2006 CA 63, 2006 CA
71, 2006 CA 72, 2007-Ohio-3444, ¶15 (there is a presumption that BVI law mirrors Ohio
law on this issue).
{¶62} With respect to the internal affairs doctrine, appellants’ damages claims
are not barred by the doctrine as Ohio law governs this matter. In determining the
applicability of the internal affairs doctrine, courts look to the nature of the claim, not the
identity of the parties. See, e.g., Gries Sports Enterprises, Inc. v. Modell, 15 Ohio St. 3d
284 (1984). When the nature of a claim involves Ohio-based misconduct, Ohio courts
must have the authority to apply Ohio law and ensure that “foreign corporations comply
with Ohio law while conducting activities in Ohio.” State ex rel. Corrigan v. Great
Northern-Chain Restaurants, Inc., 3 Ohio App. 3d 355, 357 (8th Dist.1982). Thus, those
acting within Ohio must comply with all Ohio law and regulations, including Ohio tort
law.
{¶63} At issue is whether this case is a derivative action or a direct action. A
“derivative action” is defined as: “[a] suit by a beneficiary of a fiduciary to enforce a right
belonging to the fiduciary; esp., a suit asserted by a shareholder on the corporation’s
behalf against a third party (usu. a corporate officer) because of the corporation’s failure
to take some action against the third party.” Black’s Law Dictionary (10th ed. 2014). “A
derivative action requires the plaintiff to comply with the procedural requirements of
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Civ.R. 23.1, while a direct action does not.” Carlson v. Rabkin, 152 Ohio App. 3d 672,
2003-Ohio-2071, ¶8 (1st Dist.)
{¶64} Appellants correctly stress that they are minority shareholders and that
they do not bring derivative shareholder claims based on corporate law. Instead,
appellants bring their claims for fraud, conversion, and unjust enrichment as tort
creditors. Claims alleged by minority shareholders against shareholders who control a
majority of shares in a close corporation and who use their control to deprive minority
shareholders of the benefits of their investment, may be brought as individual or direct
actions and are not subject to the provisions of Civ.R. 23.1, “Derivative Actions by
Shareholders.” Crosby v. Beam, 47 Ohio St. 3d 105, paragraph three of the syllabus
(1989). Accordingly, appellants’ claims are direct claims under Ohio law. Id.
{¶65} Based on the foregoing, the trial court’s October 22, 2015 judgments
should be reversed and remanded for further proceedings. I respectfully dissent.
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