13317962.2 i
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION (DAYTON)
THE ANTIOCH COMPANY
LITIGATION TRUST, W.
TIMOTHY MILLER, TRUSTEE,
Plaintiff,
v.
LEE MORGAN, et. al,
Defendants.
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Case No. 3:10-CV-156
Judge Timothy S. Black
PLAINTIFF’S CONSOLIDATED MEMORANDUM IN OPPOSITION TO
DEFENDANTS’ MOTIONS FOR SUMMARY JUDGMENT
TABLE OF CONTENTS
I. INTRODUCTION................................................................................................................. 1
II. PROCEDURAL BACKGROUND ...................................................................................... 1
III. FACTUAL BACKGROUND ............................................................................................... 2
A. The Moving Defendants ............................................................................................. 3
B. The 2003 Transaction ................................................................................................. 4
C. The Materially Misleading 2003 Transaction Disclosures ...................................... 5
i. The Proxy Statement Heading .......................................................................... 5
ii. The Scope of the Houlihan Opinion ................................................................. 5
iii. Omission of the fact that the Board of Directors would receive 85% of the
consideration in the 2003 Transaction .............................................................. 8
iv. The Tender Offer does not fully disclose the risks the Company was taking in
closing the transaction....................................................................................... 9
v. Goals of the transaction .................................................................................. 10
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vi. Additional material omissions ........................................................................ 10
D. ESOP Participant Communications........................................................................ 11
E. The Aftermath of the Transaction: the Defendants’ misrepresentations
regarding the health of the Company ..................................................................... 12
i. The Company issues ESOP Notes without adequate security ........................ 12
ii. Misrepresentations to shareholders and employees regarding the Company’s
performance and sale process ......................................................................... 14
iii. Further deception related to Condor ............................................................... 16
IV. SUMMARY JUDGMENT STANDARD........................................................................... 18
V. LAW AND ARGUMENT................................................................................................... 18
A. ORC § 2305.09 does not preclude the doctrines of equitable tolling and adverse
domination. ................................................................................................................ 20
B. The statute of limitations on Plaintiff’s claims should be tolled under the
doctrine of “adverse domination.” .......................................................................... 23
i. The majority of states recognize the doctrine of “adverse domination” as
applied to claims like Plaintiff’s. .................................................................... 24
ii. The Supreme Court of Ohio would apply the doctrine of “adverse
domination” to toll the statute of limitations on Plaintiff’s claims. ................ 26
iii. The Squire and Chinese Merchants cases are inapplicable to Plaintiff’s claims
against Defendants. ......................................................................................... 28
C. The statute of limitations on Plaintiff’s claims should be tolled under the
doctrines of equitable tolling and equitable estoppel............................................. 30
i. The Company stakeholders’ inability to bring an earlier action warrants
application of equitable tolling. ...................................................................... 31
ii. The Defendants’ blatant misrepresentations and concealments justify the
application of equitable tolling. ...................................................................... 34
VI. CONCLUSION.................................................................................................................... 38
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TABLE OF AUTHORITIES
Cases
Adkins v. Wolever, 554 F.3d 650 (6th Cir. 2009) ......................................................................... 19
Allen v. Wilkerson, 396 S.W.2d 493 (Tex. App. 1965) ................................................................ 25
Andrews v. Columbia Gas Transmission Corp., 544 F.3d 618 (6th Cir. 2008)............................ 19
Apicella v. PAF Corp., 17 Ohio App. 3d 245, 479 N.E.2d 315 (App. Ct. 1984) ................... 26, 27
Bailey v. V&O Press Co., 770 F.2d 601 (6th Cir. 1985) .............................................................. 24
Bates Street Shirt Co. v. Waite, 130 Me. 352, 156 A. 293 (1931)................................................ 25
B-G Leasing Co. v. First Nat’l Bank, No. H-89-56, 1991 WL 87113 (Ohio App. May 24, 1991)
................................................................................................................................................... 37
Bridge v. Ocwen Fed. Bank FSB, No. 1:07-CV-02739, 2013 WL 331095 (N.D. Ohio Jan. 29,
2013) ......................................................................................................................................... 29
Brown v. Ohio Dept. of Job & Family Servs., No. 08AP-239, 2008 WL 5197157 (Ohio App.
Dec. 11, 2008)........................................................................................................................... 31
Bryant v. Doe, 50 Ohio App.3d 19 (1988).................................................................................... 34
Byers v. Robinson, No. 08AP-204, 2008 WL 4328189 (Ohio App. Sept. 23, 2008) ................... 20
Chinese Merchants Ass’n v. Chin, 159 Ohio App. 3d 292, 823 N.E.2d 900 (App. Ct. 2004)......... .
............................................................................................................................................. 23, 28
Clark v. Milam, 192 W.Va. 398, 452 S.E.2d 714 (1994) ....................................................... 23, 25
Collins v. Sotka, 81 Ohio St. 3d 506, 692 N.E.2d 581 (1998) ................................................ 20, 31
Combs v. Int’l Ins. Co., 354 F.3d 568 (6th Cir. 2004) .................................................................. 19
Crego v. Baldwin-Lima-Hamilton Corp., No. 16515, 1998 WL 80240 (Ohio App. Feb. 27, 1998)
....................................................................................................................................... 21, 31, 32
Crosby v. Beam, 47 Ohio St. 3d 105, 548 N.E.2d 217 (1989)...................................................... 26
Cundall v. U.S. Bank, 122 Ohio St. 3d 188, 909 N.E.2d 1244 (2009) ......................................... 22
Easterly v. Budd, No. 4:06 CV 00186, 2006 WL 2404143 (N.D. Ohio Aug. 18, 2006).............. 30
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13317962.2 iv
FDIC v. Berry, 659 F.Supp. 1475 (E.D. Tenn. 1987)................................................................... 25
FDIC v. Carlson, 698 F.Supp. 178 (D.Minn. 1988)..................................................................... 25
FDIC v. Dawson, 4 F.3d 1303 (5th Cir. 1993) ............................................................................. 27
FDIC v. Gonzalez-Gorrondona, 833 F.Supp. 1545 (S.D. Fla. 1993)........................................... 25
FDIC v. Hudson, 673 F.Supp. 1039 (D. Kan. 1987) .................................................................... 25
First Fed. S. & L. Assn. of Toledo v. Perry’s Landing, Inc., 11 Ohio App. 3d 135, 463 N.E.2d
636 (App. Ct. 1983) .................................................................................................................. 37
Flagstar Bank, F.S.B. v. Airline Union’s Mortgage. Co., 128 Ohio St. 3d 529, 947 N.E.2d 672
(2011).................................................................................................................................. 18, 22
Freeland v. Enodis Corp., 540 F.3d 721 (7th Cir. 2008).............................................................. 24
Greenfield Sav. Bank v. Abercrombie, 211 Mass. 252, 97 N.E. 897 (1912) ................................ 25
Greenleaf v. Profile Cotton Mills, 235 Ala. 530, 180 So. 582 (1938).......................................... 25
Helman v. EPL Prolong, Inc., 139 Ohio App. 3d 231, 743 N.E.2d 484 (App. Ct. 2000) ............ 37
In re Am. Cont’l Corp., 794 F.Supp. 1424 (D. Ariz. 1992) .......................................................... 25
In re O.E.M./Erie, Inc., 405 B.R. 779 (W.D. Pa. 2009); .............................................................. 25
In re. Regency Village Certificate of Need Application, No. 11AP-41, 2011 WL 4541358 (Ohio
App. Sept. 30, 2011) ..................................................................................................... 20, 22, 30
Investors REIT One v Jacobs, 46 Ohio St. 3d 176, 546 N.E.2d 206 (1989)................................. 22
Jacobson-Kirsch v. Poulos, No. 26102, 2012 WL 3201697 (Ohio App. Aug. 8, 2012) .............. 21
Jim Brown Chevrolet, Inc. v. S.R. Snodgrass, A.C., 141 Ohio App. 3d 583, 752 N.E.2d 335 (App.
Ct. 2001) ................................................................................................................................... 18
Jones v. Gen. Motors Corp., 939 F.2d 380 (6th Cir. 1991) .......................................................... 34
Liberte Capital Group, LLC v. Capwill, 462 F.3d 543 (6th Cir. 2006)........................................ 32
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986).................................... 18
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McDonald & Co. Sec., Inc., Gradison Div. v. Alzheimer’s Disease & Related Disorders Assn.,
Inc., 140 Ohio App. 3d 358, 747 N.E.2d 843 (App. Ct. 2000)................................................. 20
Michelsen v. Penney, 135 F.2d 409 (2d Cir. 1943)....................................................................... 25
Muhammad v. Close, 379 F.3d 413 (6th Cir. 2004) ..................................................................... 18
Pratte v. Stewart, 125 Ohio St. 3d 473, 929 N.E.2d 415 (2010) .................................................. 22
Resolution Trust Corp v. Hecht, 333 Md. 324, 635 A.2d 394 (1994) .............................. 23, 24, 25
Resolution Trust Corp. v. Bernard, No. 94-CV-475, 1995 WL 17164886 (M.D.N.C. Aug. 8,
1995) ................................................................................................................................... 23, 25
Resolution Trust Corp. v. Fiala, 870 F.Supp. 962 (E.D. Mo. 1994) ............................................ 25
Resolution Trust Corp. v. Grant, 901 P.2d 807 (Okla. 1995)....................................................... 25
Resolution Trust Corp. v. O’Bear, Overholser, Smith & Huffer, 840 F.Supp. 1270 (N.D. Ind.
1993) ......................................................................................................................................... 25
Resolution Trust Corp. v. Scaletty, 257 Kan. 348, 891 P.2d 1110 (1995).................................... 25
Resolution Trust Corp. v. Smith, 872 F.Supp. 805 (D. Or. 1995)................................................. 25
Robert P. Butts & Co. v. Estate of Butts, 119 Ill. App. 2d 242, 255 N.E.2d 622 (1970).............. 25
Ruch v. State, No. 03AP-1070, 2004 WL 2893150 (Ohio App. Dec. 14, 2004) .......................... 34
Smith v. Lyle, 59 S.D. 534, 241 N.W. 512 (1932) ........................................................................ 25
Squire v. Guardian Trust Co., 79 Ohio App. 371, 72 N.E.2d 137 (App. Ct. 1947) ............... 23, 28
State ex rel Lien v. House, 144 Ohio St. 238, 58 N.E.2d 675 (1944). .......................................... 28
State v. Barker, No. 21438, 2007 WL 2568352 (Ohio App. Sept. 7, 2007)..................... 21, 31, 32
United Park City Mines Co. v. Greater Park City Co., 870 P.2d 880 (Utah 1993)...................... 25
Ventress v. Wallace, 111 Miss. 357, 71 So. 636 (1916) ............................................................... 25
Wasyk v. Trent, 174 Ohio St. 525, 191 N.E.2d 58 (1963) ............................................................ 31
Welsh v. United States, 844 F.2d 1239 (6th Cir. 1983) .................................................... 19, 23, 27
Williams, 599 F.Supp. at 1194 (D. Md. 1984). ............................................................................. 25
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Wilson v. Brush Wellman, Inc., 103 Ohio St. 3d 538, 817 N.E.2d 59 (2004) .............................. 20
Wilson v. Paine, 288 S.W.3d 284 (Ky. 2009)......................................................................... 25, 37
Wuliger v. Star Bank, No. 3:02 CV 1513, 2008 WL 2323887 (N.D. Ohio June 4, 2008) ........... …
................................................................................................................................. 21, 29, 31, 32
Young v. United States, 535 U.S. 43 (2002) ................................................................................. 20
Statutes
11 U.S.C. § 108(a) ........................................................................................................................ 19
Ohio Rev. Code § 2305.09................................................................................................ 18, 21, 22
Ohio Rev. Code § 1701.60.............................................................................................................. 7
ORC § 2305.09 ....................................................................................................................... 21, 22
Rules
Fed.R.Civ.P. 56(a) ........................................................................................................................ 18
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SUMMARY
The sole issue presented in the Defendants’ Motions for Summary Judgment is whether
the claims asserted in Count One of the Plaintiff’s Complaint are barred by the applicable statute
of limitations. Due to the extraordinary inequitable circumstances present in this case, the
doctrines of adverse domination and equitable apply to render the claims in Count One timely.
The Supreme Court of Ohio has not addressed the issues of adverse domination, and,
although it has accepted the doctrine, the Supreme Court has not outlined all circumstances in
which equitable tolling is applicable. Accordingly, this Court must make its best prediction of
how the Supreme Court of Ohio would rule if confronted with the question. Combs v. Int’l Ins.
Co., 354 F.3d 568, 577 (6th Cir. 2004); see also Welsh v. United States, 844 F.2d 1239, 1245
(6th Cir. 1983), overruled on other grounds by Adkins v. Wolever, 554 F.3d 650 (6th Cir. 2009).
In making this prediction, the federal court may rely upon analogous cases and relevant dicta
from the Ohio Supreme Court, opinions of the Ohio appellate courts (to the extent that they are
persuasive indicia of the Ohio Supreme Court direction on the issue), and persuasive opinions
from other jurisdictions, including the “majority rule.” Welsh, 844 F.2d at 1245.
As a threshold issue, Defendants incorrectly argue that the relevant statute of limitations
is not subject to equitable tolling or adverse domination. However, it is “hornbook law” that
courts have the power to apply equitable tolling doctrines to statutes of limitations. Byers v.
Robinson, No. 08AP-204, 2008 WL 4328189, at *13 (Ohio App Sept. 23, 2008). Furthermore,
the cases cited by Defendants allegedly in support of this faulty argument each relate to the
“discovery rule,” not equitable tolling or adverse domination. Ohio law clearly permits equitable
exceptions to the applicable four-year statute of limitations. Section V.A. Given the extremely
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inequitable circumstances present in this case, the doctrines of adverse domination and equitable
tolling should be adopted and applied.
Adverse domination would be adopted by the Supreme Court of Ohio because the
doctrine is directly in line with relevant Ohio public policy and has been accepted by a majority
of jurisdictions. See Apicella v. PAF Corp., 17 Ohio App. 3d 245, 479 N.E.2d 315 (App. Ct.
1984). Adverse domination is directly applicable to Plaintiff’s claims because the Defendants
controlled and dominated the Company (and thus would not sue themselves), and further used
such control and domination to actively misrepresent the true nature of the 2003 Transaction in
an effort to avoid litigation. Section V.B.
Equitable tolling would also be adopted and applied under the circumstances in this case.
Ohio courts have consistently recognized that the doctrine of equitable tolling may be used to
avoid the inequitable use of the statute of limitations. Wuliger v. Star Bank, No. 3:02 CV 1513,
2008 WL 2323887 (N.D. Ohio June 4, 2008). Equitable tolling is applicable to this case for two
primary reasons: (1) no disinterested party had the opportunity to bring this action within the
limitations period; and (2) the Defendants actively concealed and misrepresented facts regarding
the 2003 Transaction in an effort to avoid litigation. Section V.C.
Accordingly, the statute of limitations for the claims in Count One related to the 2003
Transaction should be tolled under the doctrines of adverse domination and equitable tolling, and
Defendants’ should be denied summary judgment.
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I. INTRODUCTION
The central question in this litigation is whether Ohio law permits the directors and
officers of a corporation – and the professionals who rubber-stamped their actions – to extract
over $200 million from the company for their personal benefit, while simultaneously
bankrupting a once-profitable enterprise, robbing creditors of their investments, and wiping out
their employees’ retirement savings. In an attempt to avoid liability for having done just that, the
Moving Defendants argue that Ohio law permits their egregious actions, so long as they were
able to maintain control over the corporation long enough to run out the statute of limitations.
Ohio law does not, and cannot, condone such behavior. Rather, existing Ohio law permits this
Court to employ the doctrines of adverse domination and equitable tolling to stop the limitations
period from running, thereby allowing Plaintiff to pursue justice against these wrongdoers.
These doctrines are widely accepted by the majority of states, are wholly consistent with Ohio
public policy, and have been applied to similar circumstances in the Ohio courts. Accordingly,
were the Supreme Court of Ohio in this Court’s position, it would adopt these doctrines. This
Court should do the same, and should deny Defendants’ motions for summary judgment.
II. PROCEDURAL BACKGROUND
Count One of the First Amended Complaint (the “Complaint”) [Adv. Doc No. 275] filed
by The Antioch Company Litigation Trust (the “Trust”), by and through W. Timothy Miller,
Trustee (the “Trustee”), alleges a cause of action for breach of fiduciary duty against certain of
the Company’s former directors and officers. Defendants Ben Carlson, Jeanine McLaughlin,
Denis Sanan, Malte von Matthiessen (the “Outside Director Defendants”), Lee Morgan, Chandra
Attiken, Asha Moran (the “Morgan Defendants”), and Nancy Blair (collectively, the “Moving
Defendants”) have moved for summary judgment (the “Motions”) [Doc Nos. 96, 98, 100] as to
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Count One. The sole issue presented by the Motions is whether Count One is barred by Ohio’s
four-year statute of limitations applicable to breach of fiduciary duty claims. Because the statute
of limitations should be tolled under the doctrines of adverse domination and equitable tolling,
Count One is timely and the Motions should be denied.
III. FACTUAL BACKGROUND1
The Antioch Company (the “Company”) – once a thriving business enterprise – was
driven into the ground by those entrusted to lead it: (a) a conflicted Board of Directors (the
“Board”) who utilized a transaction through which the Company became 100% ESOP-owned
(the “2003 Transaction”) to cash out at the peak of its financial success, no matter the cost to the
Company or the participants in its ESOP; (b) a group of officers who participated fully in the
Board’s actions and looked the other way when the Company began to show signs of distress,
and (c) professional advisors who routinely approved the Board’s actions in exchange for years
of fees.
The “leaders” of the Company not only put it on a path to bankruptcy, but for years
following the 2003 Transaction they also concealed the potential ramifications of their actions
from those who could do something about it. Specifically, they actively concealed the effects of
the 2003 Transaction, put the interests of the Morgan family and themselves above those of the
Company, and refused to change leadership as the Company endured four years of sustained
1 Deposition testimony and exhibits supporting these facts are attached in Plaintiff’s Appendix, filed herewith.
Plaintiff also incorporates by reference the factual statements, deposition testimony, and exhibits cited in the
following documents: Plaintiff’s Memorandum in Opposition to the Motion for Summary Judgment of Defendant
McDermott Will & Emery LLP; Plaintiff’s Statement of Disputed Issues of Material Fact (attached as Exhibit A);
Plaintiff’s Response to the Proposed Undisputed Facts in Support of Defendant Nancy Blair’s Motion for Summary
Judgment (attached as Exhibit B); Plaintiff’s Response to the Statement of Proposed Undisputed Facts by
Defendants Lee Morgan, Asha Morgan Moran, and Chandra Attiken (attached as Exhibit C); and Plaintiff’s
Response to Statements of Proposed Undisputed Facts of Defendants Ben Carlson, Jeanine McLaughlin, Denis
Sanan, and Malte von Mattheissen (attached as Exhibit D).
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sales declines. In fact, all of the Moving Defendants (except Ben Carlson)2 – along with the
Company’s legal counsel McDermott, Will & Emery, LLP (“MWE”) – remained in positions of
control and power at the Company through 2008. Defendants alone possessed the information
necessary to understand the effect of the 2003 Transaction on the Company’s financial health,
and the full extent to which the Board of Directors – who together took over $200 million in cash
and consideration – were conflicted when approving the 2003 Transaction. Defendants alone
were in a position to take action against their prior wrongdoings. Those same individuals now
refuse to take responsibility for the effect of their self-serving actions.
Over the years, Defendants’ concealment of relevant facts and misrepresentations to
ESOP Noteholders, ESOP participants and other stakeholders as to material matters prevented
any parties from taking action regarding the Defendants’ multiple breaches of their fiduciary
duties within the statutorily permitted timeframe. The extent to which the 2003 Transaction had
harmed the Company, and the ways that the directors and officers had concealed the urgency of
the Company’s financial distress in the interim, did not become clear until after the Trustee was
appointed.
A. The Moving Defendants
The Moving Defendants are former members of the Antioch Board of Directors and
various officers, all of whom were instrumental in the 2003 Transaction from conception to
closing. Lee Morgan (“Lee”), the son of the co-founder of the Company, served as President
and Chief Executive Officer since 1971 and chairperson of the board since 1978.3 He remained
CEO until 2008 when he was replaced by his daughter, Asha Morgan Moran. Asha Morgan
2 Ben Carlson retired in 2004 to make way for Nancy Blair to rejoin the Board after the 2003 Transaction.
Deposition of Ben Carlson (“Dep. Carlson,”) 130, June 6, 2012, Appendix Ex. 7; Deposition of Nancy Blair (“Dep.
Blair II”) 304, April 25, 2012, Appendix Ex. 4.
3 Deposition of Lee Morgan (“Dep. Morgan I”) 16, Apr. 12, 2012, Appendix Ex. 20.
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Moran (“Asha”) did not join the Company in a professional capacity until late 1999.4 She was
moved through various positions, including President of Creative Memories, and eventually
became CEO of the Company. Nancy Blair (“Blair”), a close personal friend of Asha, served
on the Board off and on from 2002 through 2008, only resigning in July 2003 to take an internal
position as “Director of Corporate Strategy” to lead the development and execution of the 2003
Transaction, and rejoining the board in 2004.5 Ben Carlson (“Carlson”) joined the Board in
1973 and served through his resignation in October 2004, when he was asked to step aside so
that Nancy Blair could rejoin the Board.6 Denis Sanan (“Sanan”) served on the Board from
1997 until June 2008, when he and all the other outside directors – Blair, von Matthiessen,
McLaughlin and Northrop – were fired. Malte von Matthiessen (“von Matthiessen”), a family
friend of Lee and his wife, Vicki, joined the Board in the late 1970s and served through June,
2008.7 Jeanine McLaughlin (“McLaughlin”) served on the Board from 1993 through June,
2008.8
B. The 2003 Transaction
The 2003 Transaction is described in the factual background section of Plaintiff’s
Memorandum in Opposition to Motion of McDermott, Will & Emery, LLP for Summary
Judgment, filed in the related case 3:09-cv-00218 (“Plaintiff’s Opp. to MWE Motion”). To save
the Court from repetition, Plaintiff incorporates such factual background as if fully restated
herein. The same 2003 Transaction is at issue in the Motions.
4 Deposition of Asha Moran (“Dep. Moran I”) 16-18, Apr. 9, 2012, Appendix Ex. 18.
5 Dep. Blair II 182-184, Appendix Ex. 4; Dep. Ex. 31, Appendix Ex. 29; Dep. Ex. 33, Appendix Ex. 30.
6 Dep. Carlson 130, Appendix Ex. 7.
7 Deposition of Malte von Matthiessen (“Dep. von Matthiessen I”) 7-11, June 4, 2012.
8 Deposition of Jeanine McLaughlin (“Dep. McLaughlin I”) 6, June 19, 2012.
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C. The Materially Misleading 2003 Transaction Disclosures
The Company issued a prospectus and tender offer (the “Tender Offer”) to the non-ESOP
shareholders on November 14, 2003 containing the terms approved by the Board at their October
30 meeting.9 The Tender Offer and accompanying Proxy Statement included a number of
misleading statements and material omissions:
i. The Proxy Statement Heading
The very first page of the proxy statement of the Tender Offer begins with the heading:
“THE ANTIOCH COMPANY OFFER TO PURCHASE ALL OUTSTANDING SHARES OF
COMMON STOCK...”10 In fact, the transaction would not have closed if the Company had been
required to purchase all outstanding shares of Company stock – closing of the 2003 Transaction
was contingent on the ESOP Trustee declining the offer with respect to the common stock held
in the ESOP.11
ii. The Scope of the Houlihan Opinion
The scope of the Houlihan fairness opinion was repeatedly misrepresented throughout the
entire Tender Offer. The very first paragraph of the proxy statement implies that the Board
relied on advice from Houlihan to the Company in deciding to approve the Transaction:
THE BOARD OF DIRECTORS OF THE COMPANY, IN RELIANCE ON ITS
FINANCIAL ADVISOR, HAS (i) DECIDED THE CASH CONSIDERATION TO BE
RECEIVED BY THE SHAREHOLDERS (OTHER THAN THE ESOP) IN
EXCHANGE FOR TENDERING THEIR SHARES IS FAIR TO ANY SUCH
SHAREHOLDER FROM A FINANCIAL POINT OF VIEW, (ii) DECIDED THE
EXCHANGE CONSIDERATION (COMPRISED OF CASH, NOTE AND
WARRANTS) TO BE RECEIVED BY THE SHAREHOLDERS (OTHER THAN THE
ESOP) IN EXCHANGE FOR TENDERING SHARES OF COMMON STOCK IS FAIR
TO ANY SUCH SHAREHOLDER FROM A FINANCIAL POINT OF VIEW, (iii)
DECIDED THAT THE CASH CONSIDERATION OF $850 PER SHARE IS IN THE
REASONABLE RANGE OF THE FAIR MARKET VALUE OF THE EXCHANGE
9 Dep. Ex. 31, Appendix Ex. 29.
10 Id.
11 Deposition of Uri Doron (“Dep. Doron”) 28, Oct. 24, 2012, Appendix Ex. 8.
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CONSIDERATION, AND (iv) APPROVED THE OFFER, THE MERGER, AND THE
OTHER TRANSACTIONS CONTEMPLATED IN CONNECTION THEREWITH.12
This statement is misleading in several ways. First, there were three financial advisors
engaged with respect to the transaction (not a singular “advisor” to the Board), but no advisor
had been engaged to issue an opinion regarding the fairness of the transaction to the Company
itself. In fact, given that the Moving Defendants are now heavily relying on the supposed advice
of Deloitte to justify their self-dealing, it is notable that the Tender Offer does not state that the
Board relied on Deloitte in any way.
Furthermore, the paragraph, read as whole, falsely suggests to the reader that the Board
consulted a financial advisor that had been specifically engaged on behalf of the Company, and
relied on its opinion in approving the Tender Offer, the merger, and the transaction as a whole.
In fact, this paragraph (with the exception of clause (iv)) directly tracks the language of
Houlihan’s written opinion of fairness from a financial perspective to the outside shareholders.13
Houlihan’s opinion, however, contains several very important disclaimers that were not included
in the Tender Offer:
This Opinion does not address (a) the Company’s underlying business decision to
effect the Transaction, (b) the fairness of the Transaction to the ESOP, or (c) the relative
fairness of the Transaction to the shareholders electing to receive cash versus the
Exchange Consideration. In addition, the Opinion does not provide any investment
advice with respect to whether any shareholder should elect to receive cash or the
Exchange Consideration or whether they should tender their shares or common stock in
the Company.
We have not been engaged to give advice as to whether the Company should engage
in the Transaction nor have we been requested to seek or identify alternatives or to
advise the Company with respect to its duties generally.14
12 Dep. Ex. 31 at 2, Appendix Ex. 29.
13 Id. at Exhibit D-1; Dep. Ex. 64, Appendix Ex. 34.
14 Dep. Ex. 31 at Appendix D-1 (emphasis added), Appendix Ex.29.
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No advisor, including Deloitte, offered any opinion as to the fairness of the transaction to
the Company, from a financial perspective or any other perspective.15 Thus, any implication that
the Board received a professional opinion as to the propriety of the transaction as a whole is
blatantly misleading.
Houlihan’s role is again misrepresented on page 83 of the Tender Offer in a further effort
to make it appear that an independent, non-conflicted financial advisor had evaluated the
Transaction and determined it to be in the best interests of the Company, when actually the
decision to proceed was made by self-dealing directors. Page 83 purports to discuss the potential
conflicts of interests with respect to the Board of Directors, and the safeguards required by Ohio
law when, as here, directors or officers are personally involved in a transaction with the
corporation. After reviewing the shares held by the directors (but, inexplicably, not the officers),
the Tender Offer paraphrases Ohio Rev. Code § 1701.60, which provides, inter alia, that a
transaction between interested directors and a corporation will not be voidable if it is “fair to the
corporation.” The Tender Offer then states “The Board of Directors of the Company has
retained Houlihan Lokey as independent financial advisor to the Company to provide an opinion
to the Board of Directors regarding the fairness of the consideration offered in the
Transaction…The Board of Directors has approved the Transaction and determined that it is fair
in reliance on the opinion of Houlihan Lokey.”16 This statement clearly mischaracterizes the
nature of the opinion delivered by Houlihan, and omits Houlihan’s disclaimers that the Board
may not rely on its opinion in the exact manner in which the Tender Offer states that the Board
did. This “disclosure” deliberately misleads the reader to believe that Houlihan issued an
15 Deposition of Peter Abrahamson (“Dep. Abrahamson”) 135-36, Feb. 28, 2012, Appendix Ex. 2.
16 Dep. Ex. 31 at 83, Appendix Ex. 29.
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opinion as to the fairness of the Transaction to the Company, not the limited opinion that the
consideration was fair, from a financial perspective, to the selling shareholders only.
iii. Omission of the fact that the Board of Directors would receive 85% of
the consideration in the 2003 Transaction
Throughout the Tender Offer, there is reference to the Board’s deliberations and
discussions with the various professionals. 17 For example, the Proxy Statement includes a
“Questions and Answers about the Transaction” section.18 The answer to the question “How was
the value of my stock determined?” states: “The price of $850 per share resulted from the
Board’s deliberations and assessment of value of the Company, an opinion from the Board’s
independent financial advisor, and negotiations between Antioch and the Trustee.”19 What the
Tender Offer fails to disclose is that the Board “deliberating” as to the value of the shares was
receiving almost all of the consideration paid out by the Company in the transaction.
Page 83 of the Tender Offer, entitled “Conflicts of Interest” is allegedly intended to
disclose just that: the Board’s conflicts.20 The document lists the number of shares and potential
cash proceeds to be received by the members of the Board who were also outside shareholders.
However, this page fails to include the shares held in trust for the benefit of Morgan family
members – including Asha and her daughter – of which Asha was the trustee, thereby
understating the amount by which the Morgan family would benefit from the Transaction by
61,098 shares, or $51,933,300.21
17 Id.
18 Id. at 2.
19 Id. at 7.
20 Id. at 83.
21 Defendants suggest that recipients of the Tender Offer should have combed through the 84-page document and its
numerous pages of appendices to find, on page 66, a table listing all of the shares owned by the Morgans. They
would be on their own, however, in determining why the numbers did not match page 83, or the significance of the
discrepancy.
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The chart purporting to disclose the directors’ conflicts, however, does not reveal what
percentage of the shares being purchased by the Company belonged to the directors who were
causing the Company to engage in the 2003 Transaction. Nowhere in the Tender Offer is it
disclosed that the members of the Board who approved the 2003 Transaction were taking 85% of
the transaction’s consideration, and that millions of dollars in consideration were going to
officers of the Company, like Hoskins and Attiken, who had active roles in bringing about the
transaction.22
iv. The Tender Offer does not fully disclose the risks the Company was
taking in closing the transaction
Page 68 of the Tender Offer purports to set forth the risks that “shareholders desiring to
choose the Exchange Consideration comprised of cash, subordinated, notes and warrants” should
consider. It does not warn ESOP participants that these risks were also material to their
symbolic vote as to whether to bless the merger. Admittedly, the Tender Offer does identify the
substantial amount of indebtedness the Company would incur to fund the transaction as a risk.
However, the Tender Offer document does not address the fact that the Company was being
rendered balance-sheet insolvent by the transaction, or that Ohio law does not permit a
corporation to buy its own shares if doing so would render the company insolvent. Nor does the
Tender Offer disclose that the transaction could be considered a fraudulent conveyance, subject
to being unwound in the future. The Tender Offer also does not explain that the transaction
could be found to be a prohibited transaction under ERISA, if the Company paid more than fair
market value for the shares.
22 Id. at 66, 83; Dep. Ex. 294, Appendix Ex.62.
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v. Goals of the transaction
Page five of the Tender Offer cites the 75/25 ESOP account allocation issue as the reason
for the transaction. In fact, the transaction did not address the allocation issue. The benefit
allocation problem continued after the Transaction. In the Equity Holder’s Agreement attached
to the Tender Offer, the Company agrees to continue to apportion future dividends of the
company by account balance – the very issue the entire transaction was allegedly designed to
address. 23 At the end of the day, the only thing the 2003 Transaction accomplished was
redistributing the Company’s cash, along with other borrowed cash, to the Defendants and
completely over-levering the Company.
vi. Additional material omissions
The Tender Offer contained numerous other misleading statements and omissions,
including:
• Disclosed the changes to the ESOP Advisory Committee approved by the board but did
not disclose the identity of the chairperson (Asha) or that she could not be replaced
without the unanimous vote of all other directors, including her father (Lee).24
• Indicates that the Company would incur “significant repurchase obligations” as a result
of the transaction and the Put Price Protection Agreement negotiated by GreatBanc, but
does not disclose any projections of the amount of these repurchase obligations, or the
fact that they are not included as liabilities on the balance sheet.25
• Never discloses the aggregate cost to purchase all non-ESOP shares in the 2003
Transaction, rather than just the per share offer price.
• Does not disclose the amount of consideration being paid to officers of the Company,
even though the feasibility of the transaction hinges on the projections of future sales and
expenses prepared by these officers.26
23 Dep. Ex. 31 at Appendix I, Appendix Ex. 29.
24 Id. at 70.
25 Id. at 38-41, 70, 80-81.
26 See id. at 83.
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• Does not disclose that Cheryl Lightle, then-president of the Company’s most successful
and profitable business unit (Creative Memories), was leaving the Company and would
be replaced by Asha, who had little experience with either the Company or direct sales.27
D. ESOP Participant Communications
In addition to the Tender Offer that was mailed to the non-ESOP shareholders and ESOP
participants, the board-sanctioned communications team undertook the task of “selling”
employees on the transaction.28 These communications were as misleading as the Tender Offer
itself. For example, individuals being “trained” to discuss the transaction with employee-owners
were informed that the Board had undertaken “significant analysis, deliberation, and due
diligence” to reach the decision to approve the transaction. 29 The communications also
represented that Deloitte had been engaged as a “Financial Advisor” in the same capacity that
Houlihan and Duff & Phelps had been engaged.30 In reality, Deloitte, who handled the Morgan’s
personal tax and estate planning, was engaged to make the transaction happen. It was not
engaged to recommend whether the Company should undertake the transaction and issued no
opinions on whatsoever in connection with the 2003 Transaction.31 Houlihan and Duff & Phelps
had been engaged to opine on the fairness of the transaction to their respective constituencies,
and only from a financial perspective. This mischaracterization of Deloitte’s role improperly
conveyed that Deloitte was acting independently to ensure that the Transaction was in the best
interests of the Company. That was simply false.
Additionally, among “key messages” the communications team was instructed to pass on
to employees was that the transaction was to be “celebrated” (employees were treated to pizza
27 Lightle was a co-founder Creative Memories and was well-known to the field of consultants. The field
consultants did not know Asha and distrusted Lee and his wife, Vickie, who was a field consultant. Deposition of
Rhonda Anderson (“Dep. Anderson”) 35-39, 60-62, Nov. 20, 2012, Appendix Ex. 111.
28 Dep. Ex. 25(B) at 9, Appendix Ex. 28; Dep. Ex. 760; Dep. Ex. 758, Appendix Ex. 108.
29 Dep. Ex. 385, Appendix Ex.71.
30 Id.
31 Dep. Abrahamson 135-136, Appendix Ex. 2; Deposition of Dan Holthaus (“Dep. Holthaus I”) 215-16,
Apr. 18, 2012, Appendix Ex. 10.
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parties and cake!).32 It was emphasized that the Board had determined the transaction to be the
Company’s “best option,” without disclosing that the Board had cursorily rejected alternatives
and that none of the professionals had been engaged to identify or evaluate alternatives that
would not result in the Board paying itself $200 million.33
The conflicted directors had breached their fiduciary duties to the Company, the impact
of which would become dramatically clear in the coming months and years as sales were in free-
fall and the Company took on increasing debt to service notes issued to departing ESOP
participants. However, after the transaction closed, the conflicted Board members now held sub-
debt and warrants and had the most to lose if the transaction were unwound. Thus, the
Defendants continued to make misrepresentations in an effort to prevent any action (such as a
lawsuit) that might unwind the transaction. As a result of these misrepresentations, the directors
themselves, and MWE, were the only parties with the information necessary to understand how
the directors had breached their duties, until the Trustee was appointed.
E. The Aftermath of the Transaction: the Defendants’ misrepresentations
regarding the health of the Company
i. The Company issues ESOP Notes without adequate security
Nearly 800 employees either left the Company or were laid off from 2004 through
2006.34 Many of these employees left voluntarily to lock in the high share price for their ESOP
accounts that resulted from the 2003 Transaction. Because the 2003 Transaction left the
Company without cash reserves, it was forced to incur additional debt to meet its obligation to
purchase the shares of the departing employees. Less than a year after the 2003 Transaction
32 Dep. Ex. 25(B) at 9, Appendix Ex. 28; Dep. Ex. 760; Dep. Ex. 758, Appendix Ex. 108.
33 Dep. Ex. 385 at 52, Appendix Ex. 71.
34 KMK-018856, Executive Summary, Confidential Information Memorandum. See Affidavit of Marcia Voorhis
Andrew, Appendix Ex. 110.
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closed, the Company already found itself without adequate cash to meet its ESOP obligations
and unable to offer security for additional debt.
Because it lacked the necessary cash, the Company issued promissory notes to its
departing employees to pay for their ESOP balances (the “ESOP Notes”).35 The Company
issued four rounds of ESOP Notes (on August 20, 2004, July 11, 2005, August 2, 2006 and
October 1, 2007) having an aggregate principal balance of $79.9 million.36
The Company was required by law to provide adequate security for the ESOP Notes.
However, the Company had pledged all of its assets as security for the bank debt incurred in the
2003 Transaction. Thus, Hoskins, as CFO, selected Condor Insurance Limited (“Condor Ins.”)
to guarantee the ESOP Notes through the issuance of surety bonds.37 Condor Ins., a Bahamian
Company, guaranteed the first three rounds of ESOP Notes.38 A clearly related entity called
Condor Guaranty, Inc. was the guarantor for the fourth round of ESOP Notes in 2007.39
The Company, having no unencumbered assets as a result of the 2003 Transaction, did
not provide collateral to Condor Ins. or Condor Guaranty, Ltd. Hoskins knew that Condor Ins.
was not an AM-Best Rated entity and was required to sign a waiver by his insurance broker
acknowledging that fact.40 Despite these warning signs that Condor Ins. was too good to be true,
Hoskins continued paying the premiums to Condor and never undertook any due diligence on
Condor Ins. or its principal.41 He was simply happy to have found someone – anyone – to
35 Dep. Ex. 338, 68.
36 Dep. Ex. 38, Appendix Ex. 31; Dep. Ex. 39 at 7, Appendix Ex. 32; Dep. Ex. 76 at 000113, Appendix Ex. 37; Dep.
Ex. 705, Appendix Ex. 104.
37 Deposition of Barry Hoskins (“Dep. Hoskins I”) 332, 339-344, Jan. 30, 2012 Appendix Ex. 11.
38 Dep. Ex. 50; Dep. Ex 51; Dep. Ex. 52.
39 Dep. Ex. 705, Appendix Ex. 104.
40 Dep. Ex. 49, Appendix Ex. 33.
41 Due diligence would have revealed multiple lawsuits for fraud against Condor and its President, Harvey Milam.
Dep. Ex. 730, Appendix Ex. 105.
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guaranty the ESOP Notes.42 However, the departing employees were not told that the guarantor
of their ESOP Notes was an un-rated, off-shore company, or that the Company had no
unencumbered assets with which to back their ESOP Notes. Instead, they were simply notified
that their ESOP Notes were “guaranteed.”43
Hoskins contracted with Condor to secure the first two rounds of ESOP Notes, but retired
in 2006 and was replaced as CFO by Karen Felix (“Felix”).44 After Hoskins' departure, Felix,
along with Lipson-Wilson, then director of corporate compliance, and Steve Bevelhymer, the
Company’s treasurer, renewed coverage with Condor in 2006 and 2007.45
ii. Misrepresentations to shareholders and employees regarding the
Company’s performance and sale process
Following the 2003 Transaction, Lee, Asha and the other directors and officers concealed
the true state of the Company’s finances and ignored warnings from key members of the
Company’s own financial staff that their sales projections were too optimistic. 46 Creative
Memories’ sales, which had experienced headwinds in 2003, started to free fall in 2004, and
never recovered. Additionally, internal problems with financial modeling, which had plagued
the Company since before the 2003 Transaction, continued to obfuscate observers’ abilities to
evaluate the Company’s health and future potential. Asha, who as President of Creative
Memories had ultimate authority to establish revenue projections, manipulated sales figures in an
attempt to present a brighter outlook of the Company’s finances to bankers and potential
42 “We – I think my – my broker, he looked for anybody out there that would offer surety bond coverage and this is
the only one he came back with...I didn’t think we’d be able to find a surety bond provider at all. At least they
didn’t think that I would be able to find one. And so we all celebrated when we actually were able to find Condor as
a surety bond provider just because we didn’t know if we were going to be able to find collateral for those
promissory notes.” Dep. Hoskins I 332:11-25, Appendix Ex.11.
43 Dep. Ex. 50; Dep. Ex 51; Dep. Ex. 52; Dep. Ex. 705, Appendix Ex. 104.
44 Dep. Hoskins I 344-45, Appendix Ex. 11; Deposition of Karen Felix (“Dep. Felix”) 84, Mar. 8, 2012, Appendix
Ex. 9.
45 Deposition of Stephen Bevelhymer (“Dep. Bevelhymer”) 118-20, Nov. 5, 2012, Appendix Ex. 3.
46 Dep. Ex. 212, Appendix Ex. 52; Dep. Ex. 451, Appendix Ex. 74.
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purchasers or investors.47 For example, in an email entitled “Asha’s Guess,” Asha manipulated
the Company’s financial data, noting that she in “no way” had confidence that the Company
could hit her “forecast.”48
Finally reaching the conclusion that the capital structure of the Company put in place by
the 2003 Transaction was unworkable, the Board retained Houlihan on March 20, 2007 to market
the Company and sell it as a going concern.49 For a factual discussion of the reasons the Board
decided to look for a buyer, and the sales process conducted by a special committee of the Board,
see Plaintiff’s Opp. to MWE Motion, which is incorporated herein by reference.
By early November, 2007, it became obvious that Houlihan’s efforts would not yield a
buyer in a change of control transaction who valued the Company at more than its debt.50 It was
also clear that, although Lee Morgan wanted to construct a deal that would keep he or Asha in
control, Lee had no financing source and was either not willing or not able to put his own money
into a deal.51 The directors and officers concealed from employees and ESOP Noteholders the
information it had gained through this process – specifically hiding that the market placed a zero
valuation on the Company’s equity.
While it was obvious sales had been in decline since the 2003 Transaction, the true extent
of the Company’s financial issues was hidden from employees. For example, each spring,
Prairie Capital would provide a value of the ESOP as of December 31 of the previous year.52
However, in 2008, as a result of the Company’s financial difficulties, its auditors were unable to
issue an audit opinion of the Company’s 2007 financials without a qualification as to the
47 Dep. Ex. 214, Appendix Ex. 53.
48 Dep. Ex. 687, Appendix Ex. 102.
49 Dep. Ex. 617, Appendix Ex. 97; Dep. Ex. 208, Appendix Ex. 51.
50 Dep. Ex. 183, Appendix Ex. 49; Dep. Ex. 472, Appendix Ex. 77; Dep. Ex. 614 at 31-36, Appendix Ex. 96.
51 Dep. Ex. 475, Appendix Ex. 78; Dep. Ex. 455, Appendix Ex. 75; Dep. Ex. 614, Appendix Ex. 96.
52 Deposition of Kenneth Lenoir (“Dep. Lenoir”) 85-88, Nov. 14, 2012, Appendix Ex. 13.
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Company’s ability to continue as a going concern.53 The Company and the ESOP Trustee then
failed to obtain a formal valuation from Prairie Capital of the fair value of the Company shares
held by the ESOP as of December 31, 2007.54 However, Ken Lenoir, an Evolve representative
and ESOP trustee, had received a letter from Prairie Capital in Spring or Summer 2008
indicating that the ESOP had no value.55 The Board and the Company were aware that the
shares were valueless no later than February 13, 2008, but never shared this information with
current or former ESOP Participants.56 ESOP shareholders were left unaware that their shares
were valueless until the bankruptcy filing in November 2008.
iii. Further deception related to Condor
As noted, Condor Ins. was insolvent and entered into bankruptcy proceedings in May
2007 and Bevelhymer, Felix, and Lipson-Wilson became aware that Condor Ins. was insolvent
shortly thereafter. Despite this knowledge, the Company continued contracting with Condor
Guaranty, Ltd. to provide security for the fourth round of ESOP Notes.57 The full Board of
Directors, along with MWE, became aware of Condor Ins.’s insolvency before January 31,
2008.58 Yet, this information was never provided to the ESOP Noteholders, and no action was
taken to seek a new surety for the ESOP Notes.
As described in Plaintiff’s Opp. to MWE Motion, by the summer of 2008, the Company
had undergone dramatic changes and was suffering from immense financial trouble.59 The
53 Letter from Larson Allen, Ap. 22, 2008. See Affidavit of Marcia Voorhis Andrew, Appendix Ex. 110.
54 Dep. Ex. 751, Appendix Ex. 107.
55 Dep. Lenoir 85-88, Appendix Ex. 13.
56 Dep. Ex. 431, Appendix Ex. 72. As late as September 21, 2008, members of the ESOP were desperately asking
the Trustee for information about the value of their shares. Dep. Ex. 748, Appendix Ex. 106; Dep. Ex. 751,
Appendix Ex. 107.
57 Dep. Bevelhymer 118-20, Appendix Ex. 3.
58 Dep. Bevelhymer 119-20, Appendix Ex. 3; Dep. Ex. 190, Appendix Ex. 50.
59 Dep. Ex. 309.
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majority of the Board of Directors had been fired in June and the Company was insolvent.60 Due
to its financial situation, by July 2008, Company management and the new board of directors
(now consisting of Lee, Asha, and G. Robert Morris) knew the Company could not make ESOP
Note payments due on August 1, 2008.61 With the first missed payment, and knowing full well
that Condor Guaranty, Ltd. would not and could not pay, the Company defaulted on the ESOP
Note payments and made a claim with Condor under the guaranty and surety agreement.62
In the meantime, Company officers and directors continued to deliberately mislead ESOP
Noteholders. In four separate letters dated August 6, 2008, September 2, 2008, October 2, 2008,
and November 1, 2008 and sent to the holders of the ESOP Notes, Asha misrepresented that
because Antioch was in “technical default” under its secured credit agreement, Bank of America,
N.A. (“BOA”), its senior secured lender, would not allow Antioch to make the payments due on
the ESOP Notes.63
The Defendants were in fact misleading the ESOP Noteholders about the reason for non-
payment in order to keep the Company’s dire financial situation, and Condor’s insolvency, secret
from the employee-owners.64 The Defendants did not want ESOP Noteholders to know the truth
– that Antioch simply had insufficient cash to pay the ESOP Notes and the Condor “guarantee”
was worthless.65 Although Asha knew that Condor failed to make the August 2008 payment
within 30 days of the claim as required, and that Condor Ins. was insolvent, her September,
October, and November letters repeated the assurance that Condor had guaranteed the Notes.66
60 Id.
61 Dep. Ex. 591, Appendix Ex. 89.
62 Deposition of Asha Morgan Moran (“Dep. Moran II”) 32-36, Apr. 10, 2012, Appendix Ex. 18.
63 Dep. Ex. 311, Appendix Ex. 64; Dep. Ex. 312, Appendix Ex. 65; Dep. Ex. 593, Appendix Ex. 90; Dep. Ex. 313,
Appendix Ex. 66.
64 Dep. Ex. 202.
65 Id.
66 Dep. Ex. 311, Appendix Ex. 64; Dep. Ex. 312, Appendix Ex. 65; Dep. Ex. 593, Appendix Ex. 90; Dep. Ex. 313,
Appendix Ex. 66.
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Each letter assured the Noteholders that the Company was financially strong and that they were
protected by the Condor Guaranties, even as late as November 1, 2008 – twelve days before the
Company filed its bankruptcy petition and a prepackaged plan of reorganization that provided for
no distributions to the holders of the ESOP Notes.67
Rather than take appropriate action, the Defendants’ took steps to hide the Condor
situation as long as possible. Hoskins’ inability to find a financially responsible guarantor for the
ESOP Notes in 2004, or otherwise collateralize those Notes with Company assets, was the
canary in the coal mine that would have signaled much more serious financial issues. However,
due to the Defendants’ misrepresentations regarding the Company’s financial despair, and the
further misrepresentations regarding Condor’s inability to honor its guaranty of the ESOP Notes,
any and all interested stakeholders were deceived as to the dire reality of the situation.
IV. SUMMARY JUDGMENT STANDARD
Summary judgment is only proper “if the movant shows that there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P.
56(a) (emphasis added). When deciding a motion for summary judgment, the Court must view
the evidence and draw all reasonable inferences in favor of the non-moving party. Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). “Thus, any direct evidence
offered by the plaintiff in response to a summary judgment motion must be accepted as true.”
Muhammad v. Close, 379 F.3d 413, 416 (6th Cir. 2004).
V. LAW AND ARGUMENT
While recognizing that statutes of limitations serve an important gate-keeping function,
the Supreme Court of Ohio has long held that “statutes of limitations are remedial in nature and
are to be given a liberal construction to permit cases to be decided upon their merits, after a court
67 Id.
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indulges every reasonable presumption and resolves all doubts in favor of giving, rather than
denying, the plaintiff an opportunity to litigate.” Flagstar Bank, F.S.B. v. Airline Union’s
Mortgage Co., 128 Ohio St. 3d 529, 531, 947 N.E.2d 672 (2011). Plaintiff agrees with
Defendants that the four-year statute of limitations in Ohio Rev. Code (“ORC”) § 2305.09(D)
applies to this case, and that Plaintiff’s cause of action for breach of fiduciary duty accrued on
December 16, 2003, “when his interest [was] impaired” by the 2003 Transaction. Jim Brown
Chevrolet, Inc. v. S.R. Snodgrass, A.C., 141 Ohio App. 3d 583, 587, 752 N.E.2d 335 (App. Ct.
2001). Over the next four-plus years, however, Defendants avoided any accountability for their
actions by dominating the Company and actively misleading other stakeholders in an effort to
avoid any lawsuits that may expose their wrongdoing. This Court should therefore apply the
doctrines of adverse domination and equitable tolling to stop the statute of limitations during
these years, and should determine that the limitations period had not expired as of November 13,
2008, when the Company filed for bankruptcy.68
When making determinations concerning substantive state law, federal courts are bound
by decisions of the state’s highest court, “unless that court would overrule its decisions on
similar facts.” Andrews v. Columbia Gas Transmission Corp., 544 F.3d 618, 624 (6th Cir.
2008). When the state’s highest court has not spoken on an issue, a federal court must make the
“best prediction, even in the absence of direct state precedent, of what the [state’s highest court]
would do if confronted with [the] question.” Combs v. Int’l Ins. Co., 354 F.3d 568, 577 (6th Cir.
2004); see also Welsh v. United States, 844 F.2d 1239, 1245 (6th Cir. 1983), overruled on other
68 Pursuant to 11 U.S.C. § 108(a), the Company’s bankruptcy filing automatically tolled the time to file this action.
“If applicable nonbankruptcy law...fixes a period within which the debtor may commence an action, and such period
has not expired before the date of the filing of the petition, the trustee may commence such action only before the
later of (1) the end of such period...or (2) two years after the order for relief.” Id. Because of the Company’s
bankruptcy filing, the statute of limitations was tolled to November 13, 2010, making the commencement of this
action timely.
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grounds by Adkins v. Wolever, 554 F.3d 650 (6th Cir. 2009). In making this prediction, the
federal court “may rely upon analogous cases and relevant dicta in the decisional law of the
State’s highest court, opinions of the State’s intermediate appellate courts to the extent that they
are persuasive indicia of State Supreme Court direction, and persuasive opinions from other
jurisdictions, including the ‘majority rule.’” Welsh, 844 F.2d at 1245. 69 Although the Supreme
Court of Ohio has not ruled on the doctrine of adverse domination, it would recognize the
doctrine under the facts of this case because its underlying policies are wholly consistent with
Ohio law, and because the vast majority of jurisdictions have accepted it. But even if this Court
does not adopt adverse domination, the Supreme Court and other Ohio courts have already
recognized and applied the doctrine of equitable tolling, and this Court should apply it to prevent
the inequitable use of the statute of limitations in this case.
A. ORC § 2305.09 does not preclude the doctrines of equitable tolling and
adverse domination.
“It is hornbook law that limitations periods are ‘customarily subject to equitable tolling.’”
Byers v. Robinson, No. 08AP-204, 2008 WL 4328189, at *13 (Ohio App. Sept. 23, 2008) (citing
Young v. United States, 535 U.S. 43, 49-50 (2002)). “In equitable matters, the court has
considerable discretion in attempting to fashion a fair and just remedy…It has the power to
fashion any remedy necessary and appropriate to do justice in a particular case.” Id. at *14
(citing McDonald & Co. Sec., Inc., Gradison Div. v. Alzheimer’s Disease & Related Disorders
69 The decision in Fish v. Greatbanc Trust Company, Case No. 09-cv-01668, 2012 U.S. Dist. LEXIS 129699 (N.D.
Ill. Sept. 12, 2012) has no persuasive authority whatsoever to the issue before this Court, for several reasons: (1) that
case involved different claims governed by a different statute of limitations; (2) discovery in that case had been
limited to the statute of limitations issue, and perhaps because plaintiffs had not had the opportunity to conduct
discovery on the merits, they did not argue for the application of the doctrines of adverse domination or equitable
tolling or discuss the misrepresentations and concealments by the Defendants that justify tolling the statute of
limitations; (3) the plaintiffs in that case were denied an opportunity to fully brief the motion for summary judgment
on statute of limitations grounds; and (4) the Illinois district court may have erred in substituting a “willful
blindness” standard in place of the statutory requirement of “actual knowledge.” See Brief of Plaintiffs-Appellants
on appeal to the U.S. Court of Appeals for the Seventh Circuit (January 22, 2013), Appendix Ex. 112.
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Assn., Inc., 140 Ohio App. 3d 358, 366, 747 N.E.2d 843 (App. Ct. 2000)). Accordingly, the
Ohio Supreme Court and several Ohio appellate courts regularly apply equitable tolling
principles to statutes of limitations under Ohio law. See, e.g., Wilson v. Brush Wellman, Inc.,
103 Ohio St. 3d 538, 551-52, 817 N.E.2d 59 (2004) (recognizing that equitable tolling can
overcome a statute of limitations defense); Collins v. Sotka, 81 Ohio St. 3d 506, 692 N.E.2d 581
(1998) (creating an equitable discovery rule despite strict language in the wrongful death statute
of limitations); In re. Regency Village Certificate of Need Application, No. 11AP-41, 2011 WL
4541358, at *8 (Ohio App. Sept. 30, 2011) (recognizing the “use of equitable tolling to stop the
clock on a statutory look-back period”); Byers, 2008 WL 4328189 (recognizing application of
equitable tolling for period of time during which attorney was incapacitated); State v. Barker,
No. 21438, 2007 WL 2568352 (Ohio App. Sept. 7, 2007) (applying equitable tolling to a
criminal statute of limitations); Crego v. Baldwin-Lima-Hamilton Corp., No. 16515, 1998 WL
80240, at *1 (Ohio App. Feb. 27, 1998) (recognizing equitable tolling of the product liability
statute of limitations).
In spite of the clear affirmation of this Court’s equitable powers, the Outside Director
Defendants wrongly argue that ORC § 2305.09 forbids the Court from even considering
equitable doctrines such as adverse domination or equitable tolling. Specifically, Defendants
argue that equitable tolling is precluded because ORC § 2305.09 does not contain an explicit
“discovery rule” for breach of fiduciary duty claims, [Doc. No. 100 at 1-2, 13-18], claiming their
“extensive research” shows that no Ohio court has applied equitable tolling to ORC § 2305.09.
[Doc. No. 100 at 25.] Defendants apparently missed Wuliger v. Star Bank, which expressly
applied equitable tolling under ORC § 2305.09 to stop the statute of limitations on a breach of
fiduciary duty claim. No. 3:02 CV 1513, 2008 WL 2323887, at *4 (N.D. Ohio June 4, 2008)
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(holding that “Ohio recognizes that the doctrine of equitable tolling may be used to avoid the
inequitable use of the statute of limitations”). Moreover, other Ohio courts implicitly recognize
that equitable tolling is applicable to breach of fiduciary duty claims under ORC § 2305.09. See,
e.g., Jacobson-Kirsch v. Poulos, No. 26102, 2012 WL 3201697, at *3 (Ohio App. Aug. 8, 2012)
(analyzing equitable tolling for a breach of fiduciary duty claim under ORC § 2305.09, but
concluding that even if tolling were applied, the plaintiff’s claims were time-barred).
Because this Court has the inherent power to employ equitable doctrines, Defendants’
reliance on four Supreme Court cases that address the so-called “discovery rule” under ORC §
2305.09 is fundamentally misplaced. See Investors REIT One v Jacobs, 46 Ohio St. 3d 176, 546
N.E.2d 206 (1989); Cundall v. U.S. Bank, 122 Ohio St. 3d 188, 909 N.E.2d 1244 (2009); Pratte
v. Stewart, 125 Ohio St. 3d 473, 929 N.E.2d 415 (2010); Flagstar Bank, F.S.B. v. Airline
Union’s Mortgage. Co., 128 Ohio St. 3d 529, 947 N.E.2d 672 (2011). In those cases, the
Supreme Court simply enforced the legislature’s creation of a limited discovery rule, which
otherwise prevents a cause of action from accruing (i.e. the clock never starts running), but never
addressed the equitable doctrines at issue in the present case. See Investors REIT One, 46 Ohio
St. 3d at 179 (“The issue presented for our consideration…queries whether the discovery rule is
available to extend the governing statute of limitations.”); Cundall, 122 Ohio St. 3d at 193-94
(holding that the statute of limitations “begins to run” when the claimant has knowledge of the
wrongdoing); Pratte, 125 Ohio St. 3d at 484 (holding that the Court’s previously created
equitable “discovery rule” had been abrogated by the legislature’s “unambiguous enactment”);70
Flagstar Bank, 128 Ohio St. 3d at 533 (declining to recognize a “delayed damages” rule under
70 As Bankruptcy Judge Humphrey astutely recognized, the Pratte decision did not establish “any law in
Ohio...other than the very specific and limited principles concerning the statute of limitation for childhood sexual
abuse claims.” Recommendations for the United States District Court for the Southern District of Ohio to Deny in
Part and Grant in Part Various Defendants’ Motions to Dismiss Certain Non-Core Causes of Action (“R&R”) 82
n.31 [Doc. No. 6].
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ORC § 2305.09 because “[b]oth the discovery rule and the delayed damages-damages rule relate
to when a cause of action accrues”) (emphasis added).
Plaintiff is not urging this Court to apply a discovery rule, delayed damages rule, or any
other rule affecting when its claims from the 2003 Transaction accrued. Instead, Plaintiff merely
asks the Court to use its equitable powers to stop – or “toll” – the running of the statue of
limitations during a period in which extremely inequitable circumstances existed. See Regency
Village, 2011 WL 4541358, at *8 (explaining that the equitable tolling doctrine “does not expand
the limitations period beyond its statutorily mandated boundaries; it, instead, merely halts the
limitations clock from ticking during the tolling period”). Plaintiff understands that ORC §
2305.09 may limit the discovery rule, but nothing in Ohio law precludes this Court from
exercising its inherent equitable powers to toll the statute of limitations in this case. To the
contrary, Ohio law clearly permits equitable exceptions to the four-year statute of limitations set
forth in ORC § 2305.09, and the logic of Investors REIT One, Cundall, Pratte, and Flagstar
Bank are simply inapplicable to the present case. Given the extremely inequitable circumstances
presented in this case, the Court should find that the statute of limitations was tolled pursuant to
the doctrines of adverse domination and equitable tolling.
B. The statute of limitations on Plaintiff’s claims should be tolled under the
doctrine of “adverse domination.”
The doctrine of adverse domination permits a Court to toll the statute of limitations for
claims against directors and officers of a corporation “for so long as the corporation is controlled
by those acting against its interests.” Clark v. Milam, 192 W.Va. 398, 402, 452 S.E.2d 714
(1994).
This is reasonable since “control of the association by culpable directors and officers
precludes the possibility of filing suit because these individuals can hardly be expected to
sue themselves or to initiate any action contrary to their own interests.”
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Resolution Trust Corp. v. Bernard, No. 94-CV-475, 1995 WL 17164886, at *6 (M.D.N.C. Aug.
8, 1995) (quoting Resolution Trust Corp v. Hecht, 333 Md. 324, 339, 635 A.2d 394 (1994)).
Although the Ohio Supreme Court has not yet addressed this issue, it would accept and apply the
doctrine in this case based on the inequitable facts present, the doctrine’s acceptance by a clear
majority of states, and the doctrine’s direct relationship with relevant Ohio public policy. See
Welsh, 844 F.2d at 1245. Plaintiff recognizes that one Ohio Appellate Court – the Eighth
District – has previously declined to apply adverse domination, see Chinese Merchants Ass’n v.
Chin, 159 Ohio App. 3d 292, 823 N.E.2d 900 (App. Ct. 2004); Squire v. Guardian Trust Co., 79
Ohio App. 371, 72 N.E.2d 137 (App. Ct. 1947), but in neither of those cases had the defendant
avoided a “timely” lawsuit by actively concealing prior wrongdoing. By contrast, Defendants in
this action avoided earlier litigation by using their control over the Company to conceal their
wrongdoing through active misrepresentations to the non-insider parties following the 2003
Transaction. Accordingly, this Court can freely apply adverse domination – and need not defer
to Chinese Merchants and Squire. See Bailey v. V&O Press Co., 770 F.2d 601, 604 (6th Cir.
1985) (holding that a federal court applying state law “is not bound by lower court
determinations if convinced by other data that the state’s highest court would determine
otherwise”).
i. The majority of states recognize the doctrine of “adverse domination”
as applied to claims like Plaintiff’s.
For decades, Courts have recognized adverse domination due to the common-sense
practicality that self-interested “officers and directors who have harmed the entity cannot be
expected to take legal action against themselves.” Freeland v. Enodis Corp., 540 F.3d 721, 741
(7th Cir. 2008); see also Hecht, 333 Md. at 346 (“In an adverse domination situation the agent
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cannot reasonably be expected to act upon or communicate knowledge of his own wrongdoing to
the corporation.”). As Judge Humphrey previously noted in his Recommendations regarding the
Defendants’ Motions to Dismiss:
The crux of adverse domination is that the individuals who are in the position of bringing
the claims are ill-suited from a motivational, ethical, and practical perspective to bring
such claims due to their needing to take adverse action against themselves or actions
attacking their own decisions, actions, or transactions. Those individuals, and the
corporation which they control, are in effect incapacitated from bringing the claims.
[Doc. No. 6 at 88.] Adverse domination acknowledges the reality that “defendants’ control of
the corporation will make it impossible for the corporate plaintiff independently to acquire the
knowledge and resources necessary to bring suit.” Hecht, 333 Md. at 346. By tolling the statute
of limitations until “the appropriate parties [are] in a position to assert claims against the
wrongdoers,” [Doc. No. 6 at 88], the doctrine of adverse domination thus prevents self-dealing
insiders “from benefiting from their lack of action on behalf of the corporation.” Wilson v. Paine,
288 S.W.3d 284, 288 (Ky. 2009) (quoting Hecht, 333 Md. at 351).
The doctrine of adverse domination is “the law in the majority of the states which have
considered the issue.” Resolution Trust Corp. v. Grant, 901 P.2d 807, 812 (Okla. 1995). At
least 23 states recognize adverse domination, either expressly or by referring to the doctrine by
another name.71 In at least 10 of these cases, a federal court first recognized the doctrine under
71 Greenleaf v. Profile Cotton Mills, 235 Ala. 530, 180 So. 582 (1938); In re Am. Cont’l Corp., 794 F.Supp. 1424,
1453 (D. Ariz. 1992) (California law); FDIC v. Gonzalez-Gorrondona, 833 F.Supp. 1545 (S.D. Fla. 1993); Robert
P. Butts & Co. v. Estate of Butts, 119 Ill. App. 2d 242, 255 N.E.2d 622 (1970); Resolution Trust Corp. v. O’Bear,
Overholser, Smith & Huffer, 840 F.Supp. 1270 (N.D. Ind. 1993); Resolution Trust Corp. v. Scaletty, 257 Kan. 348,
891 P.2d 1110 (1995); Wilson v. Paine, 288 S.W.3d 284 (Ky. 2009); Bates Street Shirt Co. v. Waite, 130 Me. 352,
156 A. 293 (1931); Hecht, 333 Md. 324; Greenfield Sav. Bank v. Abercrombie, 211 Mass. 252, 97 N.E. 897 (1912);
Ventress v. Wallace, 111 Miss. 357, 71 So. 636 (1916); FDIC v. Carlson, 698 F.Supp. 178 (D.Minn. 1988);
Resolution Trust Corp. v. Fiala, 870 F.Supp. 962 (E.D. Mo. 1994); Michelsen v. Penney, 135 F.2d 409 (2d Cir.
1943) (New York); Bernard, 1995 WL 17164886 (M.D.N.C. Aug. 8, 1995); Resolution Trust Corp. v. Grant, 901
P.2d 807 (Okla. 1995); Resolution Trust Corp. v. Smith, 872 F.Supp. 805 (D. Or. 1995); In re O.E.M./Erie, Inc., 405
B.R. 779 (W.D. Pa. 2009); Smith v. Lyle, 59 S.D. 534, 241 N.W. 512 (1932); FDIC v. Berry, 659 F.Supp. 1475
(E.D. Tenn. 1987); Allen v. Wilkerson, 396 S.W.2d 493 (Tex. App. 1965); United Park City Mines Co. v. Greater
Park City Co., 870 P.2d 880 (Utah 1993); Clark, 192 W.Va. 398.
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state law, by presuming that the state high court would do the same.72 And one federal court –
the Northern District of Indiana – recognized adverse domination in spite of unfavorable
precedent from a lower Indiana court that had refused to adopt the doctrine of “presidential
domination.” O’Bear, Overholser, Smith & Huffer, 840 F.Supp. at 1284-85 (holding that the
Indiana Supreme Court, “faced with the facts in this case, would apply the adverse domination
doctrine to toll the statute of limitations until the board was no longer dominated by the
defendants in this lawsuit”).
ii. The Supreme Court of Ohio would apply the doctrine of “adverse
domination” to toll the statute of limitations on Plaintiff’s claims.
Ohio courts have long valued the policy behind adverse domination, and have denied
timeliness defenses where it was the defendant who was responsible for the expiration of the
relevant timeframe after a wrongful transaction.73 See, e.g., Apicella v. PAF Corp., 17 Ohio
App. 3d 245, 248, 479 N.E.2d 315 (App. Ct. 1984) (refusing to apply the doctrine of laches to
bar a plaintiff’s breach of fiduciary duty claims against corporate directors). In Apicella, the
plaintiff was a corporate director who had previously assented to conflicted transactions of the
board, but later dissented and sued the other directors for actions that had given the defendant
directors personal benefit “to the detriment of [the corporation] and its shareholders.” Id. at 246,
248. The defendant directors sought to bar plaintiff’s claims on the grounds that he failed to
object when the directors first began engaging in the conflicted transactions, but the court denied
the defense and found the directors liable, noting:
72 See In re O.E.M./Erie, Inc., 405 B.R. 779, 786 (W.D. Pa. 2009); Bernard, 1995 U.S. Dist. LEXIS 12819, at *19
(M.D.N.C. Aug. 8, 1995); Resolution Trust Corp. v. Smith, 872 F.Supp. 805, 814 (D. Or. 1995); Resolution Trust
Corp. v. Fiala, 870 F.Supp. 962, 974 (E.D. Mo. 1994); FDIC v. Gonzalez-Gorrondona, 833 F.Supp. 1545, 1557
(S.D. Fla. 1993); Resolution Trust Corp. v. O’Bear, Overholser, Smith & Huffer, 840 F.Supp. 1270, 1284 (N.D. Ind.
1993); FDIC v. Carlson, 698 F.Supp. 178, 180 (D.Minn. 1988); FDIC v. Hudson, 673 F.Supp. 1039, 1043 (D. Kan.
1987); FDIC v. Berry, 659 F.Supp. 1475, 1486 (E.D. Tenn. 1987); Williams, 599 F.Supp. at 1194 (D. Md. 1984).
73 Judge Humphrey keenly recognized that “[t]he doctrine of adverse domination is consistent with Ohio
corporate and agency law.”). R&R at 89 [Doc. No. 6].
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Otherwise, this court would be condoning and encouraging catatonic boards of directors,
the failure to recognize and dissent to wrongdoing, and continuing harms to corporations.
We cannot permit such inequitable results.
Id. at 248.
In this case, Defendants used their control of the Company post-2003 Transaction to
avoid any claims, by continuing their misrepresentations regarding the health of the Company,
the value of the ESOP shareholders’ stock, and even the value of the notes paid to departing
shareholders. Based on these facts, the Supreme Court would apply adverse domination against
Defendants. This is even more certain because Antioch was a closely-held corporation,74 to
which the Supreme Court applies “a heightened fiduciary duty between majority and minority
shareholders.” Id. at 108 (noting that “the close corporation structure gives majority or
controlling shareholders opportunities to oppress minority shareholders”).
Based on Ohio’s longstanding policy to hold directors of a close corporation to a
heightened standard and to deny those directors a time-based shield to hide from their own
misdeeds, and based on highly persuasive authority from the vast majority of other states that
have considered the doctrine, the Supreme Court of Ohio would recognize adverse domination.
See Welsh, 844 F.2d at 1245 (holding that a federal court applying state law may rely upon
“persuasive opinions from other jurisdictions, including the ‘majority rule’”). Furthermore,
given the Defendants’ blatant misconduct and affirmative misrepresentations in this case, the
Court should apply adverse domination to toll the statute of limitations, and therefore deny
Defendants’ request for summary judgment based on the statute of limitations. To do otherwise
would “condon[e] and encourage[e] catatonic boards of directors, the failure to recognize and
dissent to wrongdoing, and continuing harms to corporations.” Apicella, 17 Ohio App. 3d at 248.
74 “[A] close corporation is a corporation with a few shareholders and whose corporate shares are not generally
traded on a securities market.” Crosby v. Beam, 47 Ohio St. 3d 105, 107, 548 N.E.2d 217 (1989).
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iii. The Squire and Chinese Merchants cases are inapplicable to Plaintiff’s
claims against Defendants.
Defendants’ argument regarding adverse domination boils down to this faulty contention:
because the Eighth District Court of Appeals has twice declined to apply adverse domination to
the particular facts of those two cases, the Supreme Court of Ohio would categorically reject
adverse domination in the present action. A careful analysis, however, reveals that the Squire
and Chinese Merchants cases involved mere passive concealment of the defendants’ prior acts,
and therefore did not trigger the generally-accepted requirement of active concealment or
misrepresentation. See FDIC v. Dawson, 4 F.3d 1303, 1312 (5th Cir. 1993) (limiting adverse
domination “to those cases in which the culpable directors have been active participants in
wrongdoing or fraud, rather than simply negligent”). In the present action, by contrast,
Defendants’ active misrepresentations led to the limitations period expiring before any non-
insider was in a position to challenge them. The present action therefore merits application of
the adverse domination doctrine, whereas Squire and Chinese Merchants did not.
In Squire, the Ohio Superintendent of Banks took control of a bank, and in the process of
a liquidation, asserted various claims against the bank’s former directors on behalf of the bank,
shareholders, depositors, and other creditors. 79 Ohio App. at 379. In deciding whether the
Superintendent’s claims were barred by the statute of limitations, the court considered tolling the
statute under “the doctrine of continuing dominion,” by which “some courts hold that the
limitation runs only from the time when the wrongdoing directors relinquish their control” over
the company. Id. at 386. The Squire court declined to apply the doctrine, since the
Superintendent had not alleged that the directors engaged in fraud or affirmative
misrepresentations to hide their alleged prior wrongs. See id. at 384, 385, 386, 389, and syllabus
(noting – on five separate occasions – that the directors were only accused of “mere
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concealment” by “failing to negative the effects of the original tort”). The court highlighted a
critical distinction, however, by emphasizing that statutes of limitations may be tolled if
“concealment or undiscovered fraud on the part of the defendant is found to exist.” Id. at 384
(quoting State ex rel Lien v. House, 144 Ohio St. 238, 247, 58 N.E.2d 675 (1944)).
Likewise, in Chinese Merchants, the plaintiff sued a law firm alleging legal malpractice
for alleged conflicts of interests in real estate transactions. 159 Ohio App. 3d at 294. The statute
of limitations had expired before the plaintiff filed its claims, and the plaintiff made no allegation
that the defendant law firm had engaged in any continuing deceit or misrepresentations in order
to conceal its prior alleged malpractice. To the contrary, the Chinese Merchants court found that
the plaintiff was all along aware of the potential conflict of interests that led to its claims. Id. at
296. Under those facts, the Court declined to adopt “the doctrine of adverse domination” to toll
the statute of limitations. Id. at 297.
In contrast to Squire and Chinese Merchants, and as discussed in more detail previously,
Defendants in the present action engaged in a series of affirmative actions to misrepresent the
value of the ESOP shareholders’ property following the 2003 Transaction. These
misrepresentations in turn deceived the non-insider parties into believing their shares and notes
constituted a valuable asset, thereby preventing the non-insiders from bringing any claims before
the limitations period expired. Accordingly, Squire and Chinese Merchants are inapposite to
Plaintiff’s claims in this case and therefore are not persuasive indicia of whether the Supreme
Court of Ohio would accept and apply adverse domination under the extremely inequitable
circumstances presented in this case.75
75 Defendants also incorrectly claim as binding “law of the case” Judge Humphrey’s previous dicta which noted that
Ohio courts have not applied the doctrine. [Doc. No. 96 at 6; Doc. No. 100 at 8, 26.] That statement is not the “law
of the case,” because the Recommendations – and Court’s ruling adopting them – represented an interlocutory,
rather than final, order. Ohio law is well-settled that the law of the case doctrine requires adherence only to a final,
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C. The statute of limitations on Plaintiff’s claims should be tolled under the
doctrines of equitable tolling and equitable estoppel.
As discussed earlier, Ohio courts have consistently recognized that – distinct from the
discovery rule – “the doctrine of equitable tolling may be used to avoid the inequitable use of the
statute of limitations.” Wuliger, 2008 WL 2323887, at *4. Although the Supreme Court of Ohio
has not defined the outer parameters of the equitable tolling doctrine, see Bridge v. Ocwen Fed.
Bank FSB, No. 1:07-CV-02739, 2013 WL 331095, at *12 (N.D. Ohio Jan. 29, 2013), the facts of
this case militate in favor of its application. First, the Supreme Court would equitably toll the
statute of limitations because no disinterested party had the opportunity to bring this action
within the limitations period. Second, even if – as Defendants argue – the Supreme Court would
limit equitable tolling to cases of “fraudulent concealment” or “misrepresentation,” the Court
would still equitably toll the statute in this case because Defendants’ constant and active
misrepresentations following the 2003 Transaction perfectly satisfy this standard.
Although they are technically distinct, the doctrines of “equitable tolling” and “equitable
estoppel” are often confused with each other. See Easterly v. Budd, No. 4:06 CV 00186, 2006
WL 2404143, at *9-10 (N.D. Ohio Aug. 18, 2006) (“Equitable tolling applies where there lacks
any allegation of impropriety on the defendant’s part, while equitable estoppel (otherwise
referred to as fraudulent concealment) applies exclusively in situations where demonstrated
egregious wrongdoing by a defendant prevents a plaintiff from bringing suit on a claim of which
plaintiff is aware.”). Some Ohio courts, on which Defendants rely, have conflated the doctrines
appealable order of a trial or appellate court, because a court is always free under Civ.R. 54(B) to revisit its previous
interlocutory rulings. See Creaturo v. Duko, No. 04 CO 1, 2005 WL 678513, at *4 (App. Ct. March 14, 2005)
(holding that a ruling on a motion to dismiss was not “law of the case” for purposes of a later motion for summary
judgment).75 Additionally, Ohio law is clear that “[d]icta is not authoritative, and, by definition, cannot be the
binding law of the case,” because the doctrine applies only to the essential holding of a court’s final decision. See
Gissiner v. Cincinnati, No. C-070536, 2008 WL 2550755, at *3 (App. Ct. June 27, 2008). The only “essential
holding” of the Court’s prior rulings was that any determination on tolling the statute of limitations “is a factual
matter,” and therefore any comments on adverse domination were simply dicta. [Doc. No. 26 at 5.]
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by stating that equitable tolling is premised on fraudulent concealment, misrepresentation, or
promise of a better settlement offer. [Doc. 100 at 21.] Other Ohio courts have been more
precise, distinguishing the misrepresentations required for equitable estoppel from the broader
circumstances in which equitable tolling may be applied. See, e.g., Regency Village, 2011 WL
4541358, at *9 (holding that equitable tolling was available where the plaintiff has been
diligently pursuing his rights, but some extraordinary circumstance stood in his way). Given the
facts of this case, both theories are applicable and should be adopted to toll the statute of
limitations.
i. The Company stakeholders’ inability to bring an earlier action
warrants application of equitable tolling.
Courts can apply equitable tolling wherever justice requires, and “[e]quitable tolling is
thus determined on a case-by-case basis.” Brown v. Ohio Dept. of Job & Family Servs., No.
08AP-239, 2008 WL 5197157, *4 (Ohio App. Dec. 11, 2008). Contrary to Defendants’ claims,
numerous Ohio courts have applied equitable tolling in circumstances other than fraudulent
concealment, misrepresentation, or promises of a better settlement offer. See, e.g., Collins, 81
Ohio St. 3d 506; Wasyk v. Trent, 174 Ohio St. 525, 191 N.E.2d 58 (1963); Crego, 1998 WL
80240; Barker, 2007 WL 2568352; Wuliger, 2008 WL 2323887. Based on these cases, the
Supreme Court of Ohio would apply equitable tolling to remedy the extraordinarily inequitable
circumstances in this case.
In Wasyk, the Supreme Court used its equitable powers to salvage a claim that was
technically subject to the statute of limitations. 174 Ohio St. 525. The plaintiff filed an Ohio
state court action after an earlier federal action had been dismissed for lack of diversity
jurisdiction, but the statute of limitations had expired in the intervening time before the state-
court complaint was filed. Id. at 526. In order to “permit the decision of cases upon their merits
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rather than upon mere technicalities of procedure,” the Court implemented a “liberal
construction” of Ohio’s savings statute (ORC § 2305.19) and allowed the claim to survive. Id. at
528-29. Applying these same equitable principles, the Supreme Court in Collins created an
equitable discovery rule to Ohio’s wrongful death statute. See 81 Ohio St. 3d at 510 (“It is
illogical to penalize the victim’s survivors, who have already suffered a great loss, by shortening
or extinguishing the time in which they may bring a wrongful death lawsuit. To do so merely
rewards the criminal defendant.”).
Other Ohio courts have followed the Supreme Court and affirmed the judiciary’s broad
powers to apply equitable tolling. In a case precisely like the present litigation, the Wuliger court
equitably tolled a breach of fiduciary duty claim where it would have otherwise been barred by
the strict terms of ORC § 2305.09. 2008 WL 2323887. The underlying claims in Wuliger arose
from the Liberte Capital Group litigation, which involved an allegedly fraudulent investment
scheme. See Liberte Capital Group, LLC v. Capwill, 462 F.3d 543, 547 (6th Cir. 2006). A
receiver was appointed and sued several banks for breach of duty of good faith, and the banks
argued that the receiver’s claims were barred by the statute of limitations. Wuliger, 2008 WL
2323887 at *2, 4. Because the receiver did not have access to the bank records until 1999 and
was not authorized to pursue claims against the banks until 2002, the court equitably tolled the
statute of limitations to prevent injustice. Id. at *4.
Similarly, in Crego, the court equitably tolled the product liability statute of limitations
“in the interest of justice” where the plaintiff conducted a “reasonable and diligent inquiry” but
failed to prosecute his claims within the limitations period for “reasons beyond his control.”
1998 WL 80240 at *6 (holding that the equitable tolling doctrine does not require a showing of
fraudulent concealment or misrepresentation); see also Barker, 2007 WL 2568352, at *3
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(applying equitable tolling “to prevent [defendant’s] own actions from depriving the State of an
opportunity to have his competence restored”).
The circumstances present in this case are strikingly similar to the circumstances that
justified equitable tolling in Wuliger, Crego, Barker, et al., and warrant resolution on the merits
rather than dismissal under a rigid application of the statute of limitations. Defendants conceived
of, planned, and implemented the 2003 Transaction. After they had “cashed out,” the now 100%
employee-owners were left with a Company that was balance sheet insolvent, highly leveraged,
and failing to meet unrealistic and inflated sales projections. To make matters even more
inequitable, the new 100% employee-owners and the Company’s creditors, who held all the risk
of the company’s failure, did not even get a say in the control and management of the company.
Instead, Defendants – the directors and officers that received millions of dollars from this
transaction – retained all control over the Company and prevented the employee-owners from
understanding that the 2003 Transaction sent the Company into a financial free fall. Just as in
Wuliger, until the Trust was created through the bankruptcy proceeding and the Trustee was
assigned the Company’s claims and given access to the relevant records, there was no party
capable of asserting claims against Defendants. This is not a case in which the Trust simply
failed to assert its rights in a timely manner. Instead, this is an exceptional situation where,
during the limitations period, no party existed to bring the claims that are now being asserted.
Equity therefore requires that the statute of limitations be tolled from the date of the 2003
Transaction until the date when the Trust was assigned the Company’s claims.
The Outside Director Defendants seek protection in arguing that, because Defendants had
access to the information necessary to assert timely claims against themselves, the Company by
definition must have possessed that information as well. [Doc. No. 100 at 27-28.] In essence,
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Defendants are asking this Court to hold that since the conflicted, interested, and self-serving
directors and officers did not sue themselves, they can never be sued because they were able to
keep control for four years after closing the 2003 Transaction. Such a position is untenable.
Based on the policies in its own decisions and the persuasive decisions of other Ohio courts, the
Supreme Court of Ohio would clearly apply equitable tolling to the inequitable circumstances
presented in this case. Accordingly, this Court should toll the statute of limitations on Plaintiff’s
claims related to the 2003 Transaction until the date when the Trust was created.
ii. The Defendants’ blatant misrepresentations and concealments justify
the application of equitable tolling.
Even if this Court finds that equitable tolling is constrained to cases involving fraudulent
concealment or misrepresentation, the Court should still toll the statute of limitations based on
Defendants’ constant barrage of misrepresentations and concealments after the 2003 Transaction.
See Ruch v. State, No. 03AP-1070, 2004 WL 2893150, at *3 (Ohio App. Dec. 14, 2004) (“To
successfully raise a claim of equitable tolling, a party must show a misrepresentation whether
made in good faith or not that was calculated to induce a plaintiff to forgo the right to
sue…Actual fraud or an intent to deceive is not an essential element of an estoppel to plead the
statute of limitations.”) (emphasis added) (citing Jones v. Gen. Motors Corp., 939 F.2d 380, 385
(6th Cir. 1991); Bryant v. Doe, 50 Ohio App.3d 19, 21 (1988)).
Specifically, Defendants made a number of misrepresentations in a blatant effort to avoid
a lawsuit by masking the fact that the 2003 Transaction drove the company to insolvency.
Plaintiff has already explained the egregious misrepresentations in the Tender Offer itself, as
well as misrepresentations of the board-sanctioned communications team that undertook the task
of selling employees on the Transaction. See supra Sections III.C., III.D. More importantly,
however, after the 2003 Transaction Defendants engaged in a lengthy series of
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misrepresentations in order to mislead any interested parties from initiating legal action. See
supra Section III.E.
First, Defendants manipulated the Company’s sales figures – thereby inflating the stated
value of the ESOP’s shares – in an attempt to present a more positive picture of the Company’s
finances to shareholders, bankers, and other interested parties.76 For example, in an email
entitled “Asha’s Guess,” Asha manipulated the Company’s financial data, noting intentionally
that she in “no way” had confidence that the Company could hit her “forecast.” 77
Second, Defendants kept ESOP shareholders and employees in the dark about the true
extent of the Company’s financial problems following the 2003 Transaction.78 For example, the
Company and the ESOP Trustee failed to obtain a valuation of the ESOP’s shares for 2007.79 In
fact, just a few months later – in 2008 – Defendants were made aware of a letter from Prairie
Capital indicating that the ESOP had no value.80 They avoided a lawsuit, however, by declining
to share this information with the ESOP shareholders.81
Third, by the summer of 2008, the Company had undergone dramatic changes and was
suffering from immense financial trouble.82 The majority of the Board of Directors had been
fired in June and the Company was insolvent.83 Due to its financial situation, by July 2008,
Company management and the new board of directors (now consisting of Lee, Asha, and G.
Robert Morris) knew the Company could not make ESOP Note payments due on August 1,
76 Dep. Ex. 214, Appendix Ex. 53.
77 Dep. Ex. 687, Appendix Ex. 102.
78 Dep. Lenoir 85-88, Appendix Ex.13.
79 Id.
80 Id.
81 As late as September 21, 2008, members of the ESOP were desperate for information about the value of their
shares and asking the Trustee for information. Dep. Ex. 748, Appendix Ex. 106; Dep. Ex. 751, Appendix Ex. 107.
82 Dep. Ex. 309.
83 Id.
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2008.84 With the first missed payment and knowing full well that Condor Guaranty, Ltd. would
not and could not pay, the Company notified Condor of the Company’s default on the ESOP
Notes payments and made a claim under the guaranty and surety agreement for Condor to make
the payments on the company’s behalf.85 While this was happening, company officers and
directors continued to deliberately mislead Noteholders about the financial condition of the
Company and Condor. In mid-2007, some Defendants became aware that Condor Insurance was
insolvent, and all Defendants learned of that insolvency before January 31, 2008.86 They hid this
information from the holders of the ESOP Notes, however, and still contracted with Condor
Guaranty, Ltd. to provide security for the fourth round of ESOP Notes. 87 In doing so,
Defendants actively concealed information that otherwise could have led to an earlier lawsuit
against the Company.
Fourth, in four separate letters sent dated August 6, 2008, September 2, 2008, October 2,
2008, and November 1, 2008 to the holders of the ESOP Notes, Asha told the Noteholders that
Antioch was in “technical default” under its secured credit agreement and that Bank of America,
N.A. (“BOA”), its senior secured lender, would not allow Antioch to make the payments due on
the ESOP Notes.88 The officers of the Company were in fact misleading the Noteholders about
the reason for non-payment, in order to keep the Company’s dire financial situation secret from
the employee-owners.89 The officers did not want Noteholders or employee-owners to know that
84 Dep. Ex. 591, Appendix Ex. 89.
85 Dep. Moran II 32-36, Appendix Ex. 18.
86 Dep. Bevelhymer 119-20, Appendix Ex. 3; Dep. Ex. 190, Appendix Ex. 50 (“will the situation be a surprise to
Mgmt. Morgan & Candlewood? “not at all – they are all aware of the situation regarding Condor.”); Dep. Lenoir 98-
102, Appendix Ex. 13 (“...this was not the first bond surety that I have seen that has been offshore and has been a
farce. So we Googled Condor Guaranty and we found out that Condor Guaranty was basically a sham...”).
87 Dep. Bevelhymer 109, Appendix Ex. 3.
88 Dep. Ex. 311, Appendix Ex. 64; Dep. Ex. 312, Appendix Ex. 65; Dep. Ex. 593, Appendix Ex. 90; Dep. Ex. 313,
Appendix Ex. 66.
89 Dep. Ex. 202.
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Antioch simply had insufficient cash to pay the ESOP Notes.90 The letters contained other
misleading statements. Although Defendant Asha knew that Condor failed to make the August
2008 payment within thirty days of its claim as required, and that Condor Ins. was insolvent, her
September, October, and November letters still assured Noteholders that Condor had guaranteed
the Notes.91 Each letter assured the Noteholders that the Company was pursuing a sale process,
and even as late as November 1, 2008 – twelve days before the Company filed its bankruptcy
petition and a prepackaged plan of reorganization that provided for no distributions whatsoever
to the Noteholders – Asha assured the Noteholders that Antioch was financially strong and that
they were protected by the Condor Guaranties.92
In an attempt to avoid the impact of these blatant misrepresentations, the Moving
Defendants argue that because the knowledge of the directors and officers is imputed to the
Company, equitable tolling is not available because the Company was supposedly aware of all
the directors’ and officers’ misdeeds. [Doc. No. 100 at 27-28.] Such a circular and misleading
argument has no basis in Ohio law. See B-G Leasing Co. v. First Nat’l Bank, No. H-89-56, 1991
WL 87113, at *5 (Ohio App. May 24, 1991) (“Knowledge of a corporate officer is not ipso facto,
the knowledge of the corporation merely because he occupies a corporate office…If knowledge
acquired is not within the scope of authority, or if he is acting fraudulently or adversely to the
corporation, the corporation is not bound by the knowledge of its officers where the relation of
the agent to the subject matter renders it certain that he will not disclose such knowledge.”); see
also Wilson v. Paine, 288 S.W.3d 284, 287 (Ky. 2009) (“knowledge is not imputed if the agent is
acting in a manner adverse to the interests of the principal.”)
90 Id.
91 Dep. Ex. 311, Appendix Ex. 64; Dep. Ex. 312, Appendix Ex. 65; Dep. Ex. 593, Appendix Ex. 90; Dep. Ex. 313,
Appendix Ex. 66.
92 Id.
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At a minimum, there is a genuine issue of material fact as to whether these
misrepresentations are sufficient to justify the application of equitable tolling or equitable
estoppel. Ohio law is clear that the “applicability of the doctrine of equitable estoppel is
generally an issue to be determined by the trier of fact.” Helman v. EPL Prolong, Inc., 139 Ohio
App. 3d 231, 246, 743 N.E.2d 484 (App. Ct. 2000) (citing First Fed. S. & L. Assn. of Toledo v.
Perry’s Landing, Inc., 11 Ohio App. 3d 135, 147, 463 N.E.2d 636 (App. Ct. 1983)). In Helman,
plaintiffs asserted claims against a company’s owners and officers (who were significant
shareholders) related to the purchase of “preprimary” shares that were never delivered. Id. at
235-36. Although the relevant statute of limitations had expired, the plaintiffs asserted that the
doctrine of equitable tolling should be applied based on the defendants’ repeated assurances that
they would receive shares of stock. Id. at 246. The court held that it was “a question of material
fact whether any defendants made fraudulent statements” and “whether such statements induced
[plaintiffs] to forgo their rights under the statute of limitations.” Id. at 247. Similarly, it is a
question of material fact as to whether the Defendants’ repeated misrepresentations in this case
had the effect of inducing the Company’s stakeholders to forgo or delay any lawsuit related to
the 2003 Transaction. Accordingly, summary judgment is inappropriate and the Motions should
be denied.
VI. CONCLUSION
The Moving Defendants conceived of, executed, and benefitted from the 2003
Transaction. They took no action to ensure that any objective, disinterested party protected the
Company’s interests before, during, or after the transaction. They repeatedly withheld material
facts from stakeholders. They sabotaged efforts to preserve the assets of the Company and
facilitated the Morgan’s efforts to retain control of the Company. Permitting these Moving
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Defendants to escape responsibility because of their own failures to act in accordance with their
duties to the Company would sanction their wrongful conduct. Accordingly, the statute of
limitations for the claims in Count One related to the 2003 Transaction should be tolled under the
doctrines of adverse domination and equitable tolling. At a minimum, there is a genuine issue of
material fact as to whether the Moving Defendants’ misrepresentations following the 2003
Transaction had the effect of preventing stakeholders from bringing claims, and therefore the
Motions should be denied.
Respectfully submitted,
/s/ Marcia Voorhis Andrew
Marcia Voorhis Andrew (0040289)
Taft Stettinius & Hollister LLP
425 Walnut Street, Suite 1800
Cincinnati, OH 45202-3957
(513) 381-2838 Phone
(513) 381-0205 Fax
andrew@taftlaw.com
Counsel for The Antioch Company Litigation Trust,
W. Timothy Miller, Trustee
CERTIFICATE OF SERVICE
I certify that on February 22, 2013, a copy of the foregoing was filed electronically.
Notice of this filing will be sent to all parties by operation of the Court’s electronic filing system
at the email address registered with the Court.
/s/ Marcia Voorhis Andrew
Marcia Voorhis Andrew
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