Opinion
A-1109353
04-13-2012
CHRISTINA RYDIN MARCH, Plaintiff v. MICHIEL J. SCHUITEMAKER, Defendants
DECISION
This case is before the Court on Plaintiffs Motion for Preliminary Injunction. A hearing was held on January 6 and February 3, 2012 and the parties have submitted briefs in support of their respective positions. For the reasons discussed below, the motion is granted in part, with a narrowly tailored remedy that will protect Cincinnati, Inc., its employees and shareholders,
I. BACKGROUND
Plaintiff Christina March is a shareholder of Cincinnati, Inc., a family owned business. The number of shares she owns is in dispute. She brings this action against her husband Michiel Schuitemaker, current CEO of Cincinnati Inc., as well as the Company itself, its directors and two limited liability companies set up by Schuitemaker to hold property transferred from Cincinnati, Inc.
In her motion for a preliminary injunction, Plaintiff seeks to enjoin Defendants Schuitemaker and the two LLC's (7420 Kilby and 7420 Kilby Leasing) from transferring, selling, encumbering or otherwise disposing of any assets. She also seeks to enjoin Cincinnati, Inc. from transferring any further assets to the LLC's.
II. FACTS
Cincinnati, Inc. is a family owned business started by Plaintiffs family. It began having difficulty obtaining financing and had suffered operating losses for several years.
In 2009, Defendant Schuitemaker purchased a promissory note from Plaintiffs father (Perrin March) and mother (as Trustees). The note was in an amount over $17 million and represented money owed from Cincinnati, Inc. to Perrin March for loans he made the company. Schuitemaker purchased the note for $50,000 based on a valuation report conducted by an accounting firm. Due to the financial condition of the Company, the accountants determined that the unsecured $17 million note was worth only $50,000. On April 1, 2010, the note was amended and restated to show that Cincinnati, Inc. owed Schuitemaker $17 million on demand. Schuitemaker signed both for himself as holder and as President of the Company.
The Company was having difficulty obtaining financing. When its primary lender refused to lend any more funds, the Company and its accountant (a different firm than prepared the valuation referred to above) began seeking sources of alternative funding.
With input from the account, Doug Lange, the Company devised a plan whereby it would sell real estate and equipment owned by the Company, presumably to enhance its balance sheet. The Company would then lease the property and equipment back from the buyer. According to the accountant, this would enhance the Company's borrowing ability and enhance its balance sheet. It also would provide a stream of cash flow from the purchase (assuming the cash influx was greater than the lease payments). According to the plan, the Kilby entities would be able to borrow funds against the property and equipment (where the company could not, due to its other obligations- particularly its pension obligation). The Kilby entities would then provide the cash to Cincinnati, Inc. in the form of principal and interest payments.
On October 15, 2009, the Board of Directors authorized Defendant Schuitemaker as President to sell the land and buildings of the Company. On July 15, 2010, they authorized him to sell all office and plant equipment.
The real estate had been appraised as of August ], 2009 at a total value of approximately $8.3 million. The machinery and equipment was appraised as of September 2010 at approximately $7.9 million.
On May 10, 2010, Cincinnati, Inc. sold the real estate to 7420 Kilby LLC for $8.62 million. In return, Kilby executed a promissory note for the entire amount (Cincinnati, Inc. received no cash, but merely a promise to pay). In fact, the Company was to receive interest only payments (quarterly) until the note matured 9 years later. Per the audited financial statements, it appears that Kilby is making some principal payments as well (even if not required to). See note 8 to the audited statements. While the plan was to have the Kilby entities provide the cash flow, there is no requirement that they pay anything except interest for 9 years. They have apparently voluntarily paid the principal as well, providing additional cash flow to Cincinnati, Inc.
On January 31, 2011, the Company sold all the equipment to 7420 Kilby Leasing, Inc. for $7.9 million. Again, Cincinnati, Inc. received a note for the full amount in return. And again, the Company was to receive interest only for a period of 9 years until the note matured.
The accountant testified that these deals conferred a benefit on Cincinnati, Inc. They also conferred a benefit on the LLC's, and as discussed below, on Defendant Schuitemaker. Cincinnati, Inc. leases the property and equipment from the LLC's and they receive the rental payments. Cincinnati, Inc. agreed to pay $100,000 per month for the equipment and $75,000 per month for the real property (the monthly rent increases over the term of the lease). Total rental payments on the real estate to be paid by Cincinnati, Inc. is $14.2 million. Schuitemaker signed the lease both on behalf of the Company and his LLCs.
7420 Kilby LLC has as its members Schuitemaker (10%) and each of his three children's trusts (30% each). 7420 Kilby Leasing LLC is owned entirely by Schuitemaker who is its sole member.
Not only does Schuitemaker own, at least in part (with his children owning the rest), the LLC's who bought the real estate and equipment, he also benefited from the transaction in his capacity as holder of the $17 million note (which he purchased for $50,000).
Cincinnati, Inc.'s year end 2010 audited financial statements disclose the $17 million loan payable to Schuitemaker. Curiously, even though the note is unsecured, footnote 4 to the financial statements state that it is collateralized by the pledge of the $8.3 million note receivable from the sale of land to Kelly LLC. The $50,000 value was based in part on the fact that the note was unsecured.
At the year end 2009 and 2010, the loan to related party (Schuitemaker) is listed at $17 million. The internal balance sheet as of November 30, 2011 (nearly a year later), shows a reduction of nearly $8 million from November 30, 2010 of "loans payable." One could infer that the Company considered its sale of equipment to the LLC's to reduce its obligation to Schuitemaker (thus benefiting him). This interpretation is confirmed by the monthly internal 2011 balance sheet which shows that the reduction of $8 million in loans payable took place between January and February - exactly the time the equipment was transferred to Schuitemaker's LLC (and the amount it owes the Company).
The evidence also established that Cincinnati, Inc. transferred $750,000 to Kilby Leasing which it returned to the Company at a later date. Schuitemaker thus transferred this money to his solely owned LLC for no apparent consideration.
III. DISCUSSION
As stated by the First District Court of Appeals in Procter & Gamble Company v. Stoneham (1st Dist. 2001), 140 Ohio App.3d 260:
The purpose of a preliminary injunction is to preserve a status between the parties pending a trial on the merits. Ordinarily, a party requesting a preliminary injunction must show that (1) there is a substantial likelihood that the plaintiff will prevail on the merits, (2) the plaintiff will suffer irreparable injury if the injunction is not granted, (3) no third parties will be unjustifiably harmed if the injunction is granted, and (4) the public interest will be served by the injunction.(Footnotes and citations omitted). These elements must be proved by clear and convincing evidence.
A. Substantial Likelihood of Success on the Merits
Plaintiff brings this action individually and derivatively on behalf of the Company. Plaintiff alleges, among other things: breach of fiduciary duty by Schuitemaker and the Board; breach of shareholder rights by a transfer of substantially all the assets; conversion; unjust enrichment; embezzlement; and violation of O.R.C. § 1701.93. She seeks declaratory and injunctive relief.
Even though there is a dispute about the number of shares she owns, there is no dispute that Plaintiff is a shareholder of Cincinnati, Inc. As such, Defendant Schuitemaker owes her and the Company fiduciary duties. He also owes a duty of loyalty to the company to act in its interest and to not take any actions that would benefit himself at the expense of the corporation. As stated in Wing Leasing, Inc. v. M&B Aviation, Inc., (10th Dist. 1988), 44 Ohio App.3d 3 78:
It is well-established that a corporate officer occupies a position of trust in relation to his corporation. Such relationship imposes upon directors duties in the nature of a fiduciary obligation. The principles which govern the fiduciary relationship between a corporation and its directors include a duty of good faith, a duty of loyalty, a duty to refrain from self-dealing and a duty of disclosure, (citations omitted).
Plaintiff has established that she is likely to succeed on the breach of fiduciary duty claim. Defendant Schuitemaker was wearing several hats during these transactions, but first and foremost as President, shareholder and director, he owes a duty of loyalty to the Company and its shareholders. He may not engage in self dealing. Based on the facts outlined above, Plaintiff has met her burden that she is likely to succeed on this claim. Among these facts, Schuitemaker received: a $17 million note for $50,000 (perhaps paid back in part by transfer of the equipment to his solely owned LLC); $7.9 million of equipment in his solely owned LLC in return for a promise to pay with interest only for 9 years, as well as rental income from the lease-back; over $8 million in real estate in an LLC owned by him and his children's' trusts in return for a promise to pay interest only for 9 years, again with a rental stream; and transfer of $750,000 cash (the fact that he repaid it does not change the fact that he transferred it). It is true that these purchases were made at fair market value. However, there is no obligation to pay the principal to the company for 9 years. This seems contrary to the plan to provide the company with needed cash flow. And while the principal payments may voluntarily be made, there is no obligation to do so. Schuitemaker's LLC's receive rental payments with only an obligation to pay interest. Moreover, he may intend to claim that the property and equipment satisfy the Company's $17 million obligation to him.
Plaintiff also makes allegations under O.R.C. § 1701.76, sale or other disposition of assets. That section provides:
(A)(1) Provided the provisions of Chapter 1704, of the Revised Code do not prevent the transaction from being effected, a lease, sale, exchange, transfer, or other disposition of all, or substantially all, of the assets, with or without the good will, of a corporation, if not made in the usual and regular course of its business, may be made upon the terms and conditions and for the consideration, that may consist, in whole or in part, of money or other property of any description, including shares or other securities or promissory obligations of any other corporation, domestic or foreign, that may be authorized as follows:
(a) By the directors, either before or after authorization by the shareholders as required in this section; and
(b) At a meeting of the shareholders held for that purpose, by the affirmative vote of the holders of shares entitling them to exercise two-thirds of the voting power of the corporation on the proposal, or, if the articles so provide or permit, by the affirmative vote of a greater or lesser proportion, but not less than a majority, of the voting power, and by the affirmative vote of the holders of any particular class that is required by the articles.§ 1701.76(D) requires that any action to set aside a conveyance under this section must be brought within 90 days.
The Court finds that the sale of the land and equipment was not the sale of "substantially all the assets of Cincinnati, Inc. Rather, the Company has significant assets remaining including inventory and accounts receivable. Thus, Plaintiff has not established she is likely to succeed on this claim.
Because the Court has determined Plaintiff is likely to succeed on her breach of fiduciary duty claims, the Court need not address the other claims at this time.
B. Irreparable Harm
Plaintiff is seeking to enjoin the further transfer or encumbrance of the real estate and equipment. She also seeks to enjoin the transfer of any other assets. She must establish irreparable harm.
Irreparable harm is an injury for which there is no plain and adequate remedy at law and for which money damages are not sufficient. DK Products, Inc. v. System Cycle (12 Dist. 2009). 2009 Ohio 436. Injunctive relief is not appropriate to redress a past wrong. Aero Fulfillment Services, Inc. v. Tartar (1st Dist. 2007), 2007 WL 120695.
The transfer of the land and equipment to the Kilby entities has already occurred. Thus, as to these transfers, Plaintiff has an adequate remedy at law and money damages are sufficient.
However, Plaintiff has established that she and the Company would suffer irreparable harm if those properties were further transferred or encumbered by the Kilby entities without a corresponding benefit to Cincinnati, Inc. until the case could be heard. On the other hand, the Company needs to be able to operate on a daily basis and cannot be hindered in its operations by a prohibition of all transfers of assets. Thus, any remedy must be narrowly tailored.
Some transfers and encumbrances by the Kilby entities are actually necessary to prevent irreparable harm. For example, they need to be free to use the land the equipment for borrowing purposes in order to pay interest on the note. It is in Cincinnati, Inc.'s interest to continue to receive the cash flow. However, the Kilby entities should be enjoined from using these proceeds for any other purpose (other than normal operating expenses).
Any remedy must allow the Kilby entities to borrow funds to meet their obligations to Cincinnati, Inc. As long as these obligations are met, no harm will result to the company, its employees or shareholders.
C. Harm to Third Parties
As discussed above, despite Defendant's protestations to the contrary, a narrowly tailored injunction will not harm the Company or its employees. In fact, it will protect the assets of Cincinnati. Inc. The assets previously transferred wilt be protected by the Kilby entities. And the current assets will similarly be protected. Moreover, the Kilby entities will be able to maintain their payments to Cincinnati, Inc.
D. Public Interest
The public interest weighs in favor of protecting companies from improper self-dealing by its officers and shareholders.
IV. CONCLUSION
Plaintiff has established that she is entitled to a narrowly tailored injunction:
1. Prohibiting either of the Kilby entities from encumbering or transferring the previously owned assets of Cincinnati, Inc. except as necessary to make payments under the note (i.e., Kilby must use any funds borrowed to repay the notes and any excess must be held until further order of the court);
2. Prohibiting Cincinnati, Inc. from transferring any assets to the Kilby entities except in the ordinary course of business;
3. Prohibiting Defendant Schuitemaker from causing any of the transfers or encumbrances referred to above.
The parties arc referred to Local Rule 17 for preparation of ail entry,