The Case for Putting it in Writing

In prior blogs, I’ve emphasized the need to get any agreement in writing. A recent court of appeals case, shows what happens when you reply on oral agreements.

The case, Catz Enters. v. Valdes, 2009 Ohio 4962, involved two checks given by one party to the other totaling $20,000. The checks were written on July 8, 1991. As alleged by the creditor, the payments were a loan to the debtors. He continued to demand payment, writing several letters to the debtors demanding payment through April 7, 2006 when the he finally filed suit. The creditor claimed there was an oral agreement calling for the debtors to repay the loan by September 6, 1991. He further alleged that the statute of limitations for filing suit was extended by his oral and written demands for payment. The debtors denied there was a loan.

Written in Ohio statutes are various “statutes of limitation” setting forth the time by which a party must take action against another for any alleged wrongdoing. For example, an action based on negligence (a car accident, for example) must be filed within two years. In the case of contracts, the statute of limitations on a written contract is 15 years. The statute of limitations on an oral contract is 6 years.

As stated by the court, “the statute of limitations on oral contracts is six years and ...The six year statute of limitations may be extended [only] if there is a writing, signed by the charged party, acknowledging the debt or promising to pay it, O.R.C. 2305.08.”

Since the creditor could produce no written document signed by the debtors acknowledging the debt or extending the terms of the agreement, the statute of limitations ran on September 6, 1997 (6 years from the date the loan was allegedly due). Therefore, the creditor could not enforce the debt because the statute of limitation had run.

So, we have a prime example of the consequences in relying upon an oral agreement. What is also apparent is the fact that the debtors denied there was even a loan. Therefore, the terms of the alleged agreement were even in controversy. Had the creditor obtained a document, signed by the debtors acknowledging the loan, the outcome may have been different.

The obvious – get any agreement in writing, signed by both parties.

Let the Sub-Contractor Beware

A recent decision of Franklin County Court of Appeals (10th District) should give sub-contractors fair warning that giving estimates without proper restrictions could result in general contractor’s making use of the sub’s time and energy without compensation.

In the case of Complete General Construction Co. v. Kard Welding, Inc., 182 Ohio App.3d 119, Complete submitted an estimate to Kard for supplying steel highway ramp components. Kard used these estimates when it submitted its bid to the Ohio Department of Transportation. Kard won the bid, but used another supplier to supply the components.

In trial Complete argued that by using the estimate, Kard is estopped from using another supplier and the court should impose a contract upon Kard and award damages to Complete for breach of contract. The trial court ruled in favor of Kard saying there was no contract and, therefore, no breach. The evidence presented at the time of trial included testimony that certain terms of Complete’s bid were not acceptable and the covenants required by Complete were subject to renegotiation. Consequently, the court found that there was no acceptance of the offer by Kard.

Complete appealed the court’s decision and the appellate court sustained the lower court’s findings. In summary, the court stated:

“A subcontractor who makes a "bid" or "quote" which constitutes an offer to a general contractor, who submits a bid in reliance upon such offer, is bound to perform in accordance with the terms of that offer when the general contractor (1) is awarded the contract and (2) within a reasonable time thereafter notifies the subcontractor that the offer is accepted. Under such circumstances the subcontractor is liable in damages to the general contractor for failure to perform.”

“A general contractor's mere use of a subcontractor's quote in formulating a bid for a general contract does not constitute acceptance of the subcontractor's offer.”

Apparently, the court was looking for some memorandum or other documentation between the parties implying an acceptance of the offer by Kard given the disputed terms. The court obviously concluded that an element of contract was not met - a meeting of the minds - and, therefore, there could be no breach from which damages would arise.

The jurisdiction of this court of appeals is only Franklin County (Columbus area) but I would warn those reading this blog that the 10th Appellate Court is very influential and other courts tend to follow their opinions.

So what does one do to protect its work product? First, know whom you are dealing with. If this is the first time you are submitting a bid seek out the contractor’s reputation for “bid-shopping.” Second, work with your attorney to determine language in the bid that protects you from this type of contractor. Finally, be sure you have, in writing from the contractor, some memorandum of understanding that in the event its bid is accepted using your estimate, that your estimate is deemed a consummated contract for the purpose of performing the work or supplying the material set forth in your estimate.

Contracts and Equitable Relief

How to you solve the issue of payment when you can’t prove you have an express contract? If you’ve read this blog, you know I stress to my clients the necessity to enter into WRITTEN contracts. But for those who still rely on the “handshake” take heart. The courts do permit relief.

A typical example of this issue was discussed in the recent case of Bldg. Industry Consultants v. 3M Parkway, 182 Ohio App.3d 39, arising from the Ninth Appellate District of Ohio (Lorain). In that case the parties never entered into a formal contract. There were communications, letters and memorandums exchanged, the plaintiff did perform some services, but the parties never formally agreed on a price or for that matter an agreement outlining the contractual obligations of each party. As the court stated, the elements of a formal express contract were not present - “...offer, acceptance, contractual capacity, consideration, a manifestation of mutual assent and legality of object and consideration.”

The court went on to say, “To constitute a valid contract, both parties to a contract must assent to its terms; there must be a meeting of the minds of the parties with respect to the essential terms of the contract, which terms are also definite and certain.”

Even though there is no express contract, a court does have the power to compensate an aggrieved party under the theories of “unjust enrichment” or “quantum meruit.” In other words, the court can impose an implied or constructive contract using these theories of equitable relief. As is obvious from the term, “equitable relief” is available if it is proven that a party obtains a unjust benefit through another’s actions.

To be success ful, the aggrieved party must prove that: “... (1) a benefit has been conferred by a plaintiff upon a defendant, (2) the defendant had knowledge of the benefit, and (3) the defendant retained the benefit under circumstances where it would be unjust to do so without payment,” Bldg. Industry Consultants, v. 3M Parkway, Supra.

So even though parties do not enter into a formal written contract, given the proper evidence, a court will award payment. In this case the court did award the plaintiff payment for work the plaintiff did perform in furtherance of the project notwithstanding the fact that the plaintiff was unable to prove a formal express contract.

The Use of Cognovit Notes in Ohio

Historically, the use of cognovit notes was prevalent in Ohio. The use of this type of promissory note allowed the creditor to obtain a judgment against the debtor without the need to file legal proceedings. Based upon the terms of such a note, the creditor merely obtained the signature of any attorney who confessed judgment against the debtor for the amount owed - no lawsuit, no court proceedings and no need for presentation of evidence.

Identifying the perceived dangers in such a note, the legislature passed O.R.C. 2323.13. Entitled “Warrant of attorney to confess,” the statute sets forth certain restrictions in the use of a cognovit note.

First and foremost, a cognovit note can not be used for any transaction arising out of a “consumer loan” or “consumer transaction.” These terms are defined in the code as follows:

“(1) Consumer loan means a loan to a natural person and the debt incurred is primarily for a personal, family, educational, or household purpose. The term "consumer loan" includes the creation of debt by the lender's payment of or agreement to pay money to the debtor or to a third party for the account of the debtor; the creation of a debt by a credit to an account with the lender upon which the debtor is entitled to draw; and the forbearance of debt arising from a consumer loan.”

“(2) Consumer transaction means a sale, lease, assignment, award by chance, or other transfer of an item of goods, a service, franchise, or an intangible, to an individual for purposes that are primarily personal, family, educational, or household.”

Additionally, any note containing a confession of judgment feature (a cognovit note) must contain the following verbiage:

"Warning -- By signing this paper you give up your right to notice and court trial. If you do not pay on time a court judgment may be taken against you without your prior knowledge and the powers of a court can be used to collect from you regardless of any claims you may have against the creditor whether for returned goods, faulty goods, failure on his part to comply with the agreement, or any other cause."

This language must be in “...such type size or distinctive marking that it appears more clearly and conspicuously than anything else on the document...”

Case law has also restricted the use of cognovit notes. In a recent Pickway County case, Onda v. Johnson, 2009 Ohio 4727, the court found that the use of a cognovit note will be strictly construed not only as to the requirements of ORC 2323.13 but as to the provisions on Ohio’s Uniform Commercial Code, ORC 1301.01 et seq. The court wrote, “...[if] the cognovit note is facially insufficient, the trial court lacked subject matter jurisdiction and its judgment on the note is void ab inito.” In other words, if the terms of the note fail to meet the requirements of a promissory note as required by 1301.01, et seq., the note will be void.

While, cognovit notes are still valid for commercial transactions, it is incumbent upon the maker of the note to ensure that the note strictly complies with the edicts of ORC 2323.13 and 1301.01, et seq.

Is a Spouse Liable for the Debts of the Other Spouse?

In “Contracts 101" all law students are taught that a spouse can be held liable for the “necessities” of the other spouse. This tenant has been promulgated in Ohio in O.R.C. 3103.03. The statute states in part:

“(A) Each married person must support the person's self and spouse out of the person's property or by the person's labor. If a married person is unable to do so, the spouse of the married person must assist in the support so far as the spouse is able...

"If a married person neglects to support the person's spouse in accordance with this section, any other person, in good faith, may supply the spouse with necessaries for the support of the spouse and recover the reasonable value of the necessaries supplied from the married person who neglected to support the spouse unless the spouse abandons that person without cause.”

Historically, “necessities” have included medical care, sustenance, and housing. In the event a spouse fails to provide these necessities, the spouse or a third party may take action against the non-supporting spouse to pay for these necessities.

But what happens when the spouse is able, but fails, to pay? A recent of Ohio case, Brown v. Williamson, 2009 Ohio 4579, took up this issue. In this case, the husband failed to pay rent and the landlord sued both spouses for the back rent even though the wife did not sign the lease. The lower court found in favor of the landlord stating, in fact, the wife is liable for necessitates, which includes housing.

The appellate court disagreed, in part. The court, citing Ohio State Univ. Med. Center v. Calovini, 2002 Ohio 5756,, in part, stated, “...we agree with the trial court that housing, like medical care, qualifies as a ‘necessary’ and is a component of a spouse's support obligation under R.C. § 3103.03. But even if the statute is applicable here, [the wife is not liable] for her husband's rent obligation unless he is unable to pay the debt and she is able to aid in his support by paying it herself...”

Therefore, the court set forth the following criteria before a spouse can held liable for the debt of their spouse:

1. The debt must be for a “necessity, i.e. medical, food or housing, etc.

2. The spouse must be unable to pay for the necessity themselves, and

3. The spouse has the ability to aid in that support obligation.

As a result, it appears any creditor must exhaust all efforts against one spouse before pursuing the other spouse. And, in pursuing the other spouse, the creditor must show the other spouse has the financial means to pay the obligation.

Motion for Relief from Judgment

You discover that a judgment was erroneously taken against you. What do you do? Courts will permit a party to seek relief from a judgment taken against them if certain criteria are met. Under Rule 60 of the Ohio Rules of Civil Procedure (a set of rules that all courts and lawyers must follow to pursue or in relief from a legal claim) sets forth the rules by which a party may seek to reopen a lawsuit. While Rule 60 is a rather small bit of judicial legislation, consisting of a mere two paragraphs, it has sired a huge amount of litigation.

Rule 60 is divided into two parts. The first, subsection A, relates to “clerical errors” by the court. Basically, if there is an error or omission in an entry by the court the party or the court, on its own motion, may seek to correct that error.

Subsection B, relating to non-court errors has grown to be the most controversial. That section, known as Rule 60(B) states:

“On motion and upon such terms as are just, the court may relieve a party or his legal representative from a final judgment, order or proceeding for the following reasons: (1) mistake, inadvertence, surprise or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(B); (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation or other misconduct of an adverse party; (4) the judgment has been satisfied, released or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (5) any other reason justifying relief from the judgment. The motion shall be made within a reasonable time, and for reasons (1), (2) and (3) not more than one year after the judgment, order or proceeding was entered or taken. A motion under this subdivision (B) does not affect the finality of a judgment or suspend its operation.”

In summary, a party make seek relief from judgment for the following reasons:

1. Mistake, inadvertence, surprise or excusable neglect.

2. Newly discovered evidence

3. Fraud, misrepresentation or other misconduct by the other party

4. The judgment was satisfied, released or discharged, or

5. Any other reason justifying relief

It would appear that it might be easy to obtain relief. But, this is not true. Pursuant to the landmark case of GTE Automatic Elec., Inc. v. ARC Industries, Inc., 47 Ohio St.2d 146, any party seeking relief from judgment must demonstrate that.

1. The party has a meritorious defense or claim to present if relief is granted,

2. The party is entitled to relief under one of the grounds stated in Civ.R. 60(B), and

3. The motion is made within a reasonable time.

If any of these issues are not demonstrated bythe party, relief will be denied.

Now, you say, that’s easy, I just say I don’t owe it, cite one of the grounds and file it within one year. Not so easy. First, the party must set forth articuable facts to support its “meritorious defense.” A self serving statement that the party does not owe the debt is insufficient. Further, the party must set forth articuable facts to support its grounds for relief. Just a general statement that the judgment was obtained “through fraud” is insufficient. The party must set forth the alleged fraudulent acts of the other party. Finally, the motion must be filed within a “reasonable time.” The party can not sit on their rights. Many courts have denied motions for relief even when the party has filed its motion well within the one years requirement. For example, assuming you learn of this judgment immediately after it is rendered and wait months before filing, many courts have denied the party’s motion as being “not timely filed.”

If the motion survives a preliminary review by the court (after reading the other party’s memorandum in opposition to your motion), the court will schedule a hearing that will require you, the moving party, to demonstrate the merits of your motion. If the court finds you failed to sustain the burden, it can deny your motion.

So, if you find yourself in such a predicament, what should you do? First, you must seek redress with the court immediately. A delay could prove fatal to your motion. Second, if you do file such a motion, you must articulate, in detail, the reasons you seek relief being sure to follow the requirements of GTE Automatic Elec., Inc. v. ARC Industries, Inc, Supra. Third, and most importantly, I strongly suggest you seek benefit of counsel. Rule 60(B) has become a highly litigated section of the Ohio Rules of Civil Procedure. Due to the litiginous nature of this section, it has produced an unusually high number of cited cases that have continued to refine and delineate different case scenarios that are difficult for any layman to research and address.

Piercing the “Corporate Veil”

Under normal circumstances the corporation can insulate its shareholders and inside employees from personal liability. In fact, historically, the primary reason for incorporating a business is to prevent a creditor from attaching the personal assets of the individual shareholders. If the corporation is maintained and run as a separate entity, properly funded and avoids paying personal liabilities of its shareholders, this “Vail” can not be broken.

But if a court finds that the corporation was formed merely to shield its shareholders from their unlawful acts, then the court can order personal liability of the shareholders. In the landmark case of Belvedere Condominium Unit Owners' Ass'n v. R.E. Roark Cos., (1993) 67 Ohio St. 3d 274, The Supreme Court of Ohio promulgated criteria to justify the piercing of the corporate veil that would allow creditors to obtain personal liability of the shareholder.

In its synopsis the court stated:

“A fundamental rule of corporate law is that, normally, shareholders, officers, and directors are not liable for the debts of the corporation. An exception to this rule was developed in equity to protect creditors of a corporation from shareholders who use the corporate entity for criminal or fraudulent purposes. Under this exception, the veil of the corporation can be pierced and individual shareholders held liable for corporate misdeeds when it would be unjust to allow the shareholders to hide behind the fiction of the corporate entity. Courts will permit individual shareholder liability only if the shareholder is indistinguishable from or the alter ego of the corporation itself.

In defining its exception, the court went on to say:

“The corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.”

Over the years, these three criteria were refined to allow piercing of the corporate veil under various circumstances including, payment of personal expenses from corporate funds, undercapitalizing the corporation, using the corporation to shield the individual shareholder from statutory violations such as building code violations, banking laws, and financing law violations.

In reading the criteria, it appears that the criteria is quite burdensome. But recent court cases have eased what appears to be a draconian reading of these rules. In Dombroski v. WellPoint, Inc., 119 Ohio St.3d 506, 2008 Ohio 4827, the Ohio Supreme Court lessened the burden to litigants as it pertains to the second prong of the test, “...as to commit fraud or an illegal act against the person seeking to disregard the corporate entity.”

In its opinion the court expanded this criteria to include “...similarly unlawful act[s].” Of course, the court failed to define this term. Therefore, many courts sought to determine the court’s meaning. Many courts have attempted to define this verbiage using the Supreme Court’s statement that "[c]ourts should apply this limited expansion cautiously toward the goal of piercing the corporate veil only in instances of extreme shareholder misconduct."

A 2009 case in the Fourth Appellate District (Jackson County, Ohio) is typical of this attempt at interpretative jurisprudence. The case, Stewart v. R.A. Eberts Co., 2009 Ohio 4418, involved the purchase of a coal mine. As part of the agreement, the Plaintiff was to receive royalties of $1.00 per ton of coal. The Plaintiff attempted to obtain personal liability of the shareholders and directors. Apparently, the corporate entity that was to pay the plaintiff was unable to do so.

The Plaintiff argued that the second criteria was too restrictive; that the Supreme Court’s second criteria included "unjust or inequitable conduct.” The court rejected the Plaintiff’s argument citing the Dombroski case stating that the Plaintiff's interpretation was too liberal; that "unjust or inequitable conduct” did not rise to the level of "fraud, an illegal act, or a similarly unlawful act."

So what do we conclude from these cases:

1. That courts are still in flux regarding the interpretation of the criteria to pierce the corporate veil, and

2. That courts look to the actions of the insiders to interpret the three criteria, and

3. The actions of the insider must be unlawful, not just unjust or inequitable, i.e. fraudulent conveyance of assets, conversion of assets, etc., and

4. The interpretation of the jurisprudence set forth in Belvedere must be done on a case by case basis to determine whether the facts in that particular case meet the criteria to pierce the corporate veil.