November 2001
Vol. 4, Issue 3
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When an Agreement to Arbitrate is Binding
By Robert A. Hager, Esq. and Michael R. Shanabruch, Esq.

Ohio Courts generally favor the enforcement of agreements to arbitrate disputes. Trial courts typically resolve any dispute over whether an issue is arbitrable in favor of the party requesting arbitration. However, an agreement to arbitrate binds only the parties to the agreement.

In the recent case, Owens Flooring Company v. Hummel Construction Company (2001), 140 Ohio App.3d 825, the Portage County Court of Appeals held that a subcontractor who filed suit against both the general contractor and the property owner could not be compelled to arbitrate his claims against both parties, even though the contract between the contractor and the owner contained an arbitration clause. The court stressed that the subcontractor was not a party to the contract requiring arbitration and explained, "When the plaintiff in a suit is not a party to the contract containing the arbitration clause, the clause does not control the asserted dispute. An arbitration provision binds only the specific parties to the agreement."

It is important to note that the court's ruling does not mean that the arbitration agreement between the contractor and the owner was unenforceable. It simply means that the arbitration agreement could not be enforced against the plaintiff-subcontractor. Where a lawsuit involves multiple claims and multiple parties, and some of the parties are bound by an arbitration agreement while others are not, the trial court may stay the proceedings and refer the arbitrable claims to arbitration. When the arbitrable claims are resolved, the case may return to court for resolution of the remaining claims.

There are advantages and disadvantages to using arbitration to resolve disputes. These issues should be addressed during contract negotiations, rather than when the disputes arise.

Robert A. Hager is a shareholder and member of the Litigation, Real Estate & Construction and School Law Practice Groups and can be reached at bhager@bdblaw.com or at 216.615.7318. Michael R. Shanabruch is a member of the Real Estate & Construction and Litigation Practice Groups and can be reached at mshanabruch@bdblaw.com or at 216.615.7346 or 330.258.6479.

Shareholders' Liability for Corporate Debts
By Grant M. Yoakum, Esq.

One of the primary benefits of operating a business as a corporation is that the shareholders of the corporation are generally not individually liable for the corporation's debts. However, this limitation of liability, or "corporate veil," may not apply under certain circumstances.

In a recent decision, the Cuyahoga County Court of Appeals upheld a trial court's decision that an individual shareholder was liable for the debts of a corporate general contractor. In Longo Construction, Inc. v. ASAP Technical Services, Inc. (2000), 140 Ohio App. 3d 665, the Court affirmed the trial court's decision that the corporate general contractor's shareholder was liable for corporate debts because of the way in which the corporation operated. The Court confirmed that a determination of whether to "pierce the corporate veil" is based on the facts of each case. 

In general, a shareholder may be liable when: 

1. Control of the corporation by one or more shareholders is so complete that the corporation has no separate existence;

2. This control is exercised to commit fraud or an illegal act against a third party; and

3. The third party suffered injury or unjust loss as a result of the level of control and the shareholder wrongdoing.

In Longo, one of the shareholders so controlled the corporation's operations that he caused the reorganization of the corporation to protect the shareholder's personal loans to the corporation and ultimately had the corporation assign a significant account receivable which was ultimately deposited in the spouse of the shareholder personal bank account. The assignment further left the corporation's creditors without any assets from which to collect. The appellate court found these facts supported individual liability for one shareholder. Significantly, all the corporation's shareholders were not held individually liable, only the one responsible for the above actions. 

From a practical standpoint, this decision is important as a reminder that the corporate form is not an absolute bar to shareholder liability. The corporation must function according to certain formalities such as annual meetings and maintenance of corporate minutes and records. It must also function, to some degree, independently of its shareholders and not as an "alter-ego" of the shareholders and cannot restructure to avoid debts.

If you need further information and clarification of shareholder liability for corporate debts, Grant M. Yoakum can be reached at gyoakum@bdblaw.com or at 330.258.6431.

Practice Group Profile — John P. Slagter, Esq.
Build On This features John Slagter this quarter. John is a Shareholder and co-chair of Buckingham's Real Estate & Construction Law Practice Group. A native of Erie, Pennsylvania, John lives in Brunswick, Ohio with his wife and two sons. John graduated from John Carroll University with a degree in Political Science (concentration on public administration and policy studies) and a Business minor.

John obtained his Juris Doctorate from Case Western University School of Law in 1991. He focuses his practice on land use/zoning, real estate, and construction law. John joined the Firm in 1997, bringing with him a group of clients with whom he has close relationships. "I try to understand the client and develop a trusting relationship with each one." John reviews the client's goals to understand the foundation of the client's needs. "Sometimes it is necessary to work with the client to formulate, clarify and balance these goals." As he carries out the project, John makes it a point to stay focused on the client's needs. John believes that attorneys are also client counselors. 

Acting as a counselor, John makes sure the client understands the risks, advantages and disadvantages of each decision. Continuing with a lawsuit, for example, enhances the chance for full monetary recovery, but it also presents increased costs and the risk of receiving nothing. With all of this information in hand, the client is able to make an informed decision.

The primary focus of John's practice is in land use and zoning. This field is an emerging area of the law, with ever-changing rules. Because of this, John stays up to date on changing legal concepts. "There is a new set of rules with each governmental body," he explains. "Also, this field is both legal and political." John finds this combination especially interesting. "Zoning addresses the competing interests between the free and unrestricted right to use property, and the government's efforts to control that use."

Many landowners go to John for help after their planned property use has been denied by a zoning commission or planning board. Only then do they realize the legal aspects of this procedure. Once a decision has been made it has "presumptive validity" and is hard to change. John greatly prefers to provide assistance early in the process and to go to the government meeting with the client. He can help assure that the legally required steps are taken that will protect the client's rights. John also represents governmental entities, including serving as Special Counsel for Richfield Township. 

In his construction law practice, John represents builders, developers and public entities. He regularly reviews industry documents or project contracts. John's involvement in litigation heightens his awareness of the problems that can arise when a construction project's "front-end documents" are poorly drafted. "Drafting problems may cause delays in construction, and in this industry, time is money," he explains. "Delays can cause major expenses related to idle equipment charges, office overhead charges, and serious problems with the critical path - the construction schedule. These expenses can be enough to bankrupt the project. That is why it is so important to carefully review and draft the construction contracts."

John feels that he benefits from the new Firm Practice Group structure. At the monthly Practice Group meetings, experienced Firm attorneys speak on their area of expertise. "Our firm has many attorneys that are AV rated and/or are listed as The Best Lawyers in America®. We serve our clients by tapping into the expertise of these individuals, and working as a team to solve our clients' problems." John is also rated AV by Martindale-Hubbell, denoting pre-eminent legal ability and high ethical standards as judged by the attorney's peers.

John P. Slagter is co-chair of the Real Estate & Construction Law Practice Group and a member of the Litigation Practice Group. He can be reached at jslagter@bdblaw.com or at 216.615.7331.

Our Real Estate & Construction Group Welcomes
Michael R. Shanabruch, Staff Attorney
Real Estate & Construction Law and Litigation Practice Groups - Cleveland, Ohio Office
Michael joined the Firm in 2001. He represents corporate clients and individuals concerning commercial real estate and construction matters, including commercial litigation. In addition, his experience includes case management, pretrial conferences, drafting judgment entries and opinions in the common pleas court, as well as "winning" reversals in insurance coverage, wrongful death, criminal, and unemployment compensation cases in the appellate court.

Save The Date!
Buckingham's 2002 Annual Real Estate & Construction Law Seminar will be held on Thursday, February 28, 2002, at the Hilton Akron/Fairlawn in Akron, Ohio. The presenters will provide legislative updates and cover hot topics affecting the real estate and construction industries. For additional information contact: Maria Hawkins at mhawkins@bdblaw.com or at 330.258.6478.

Patrick J. Keating, Shareholder and Chair of the Litigation and Creditors' Rights & Bankruptcy Practice Groups (Akron, Ohio) will be a presenter for the National Business Institute seminar, Advanced Real Estate Law in Ohio. For additional information contact: The National Business Institute at 800.930.6182.

Out and About - Recent Presentations:

Ken A. Fisher, Associate (Columbus, Ohio) presented for Lorman Education Services on the topic of Design-Build/Construction Management in Ohio, on September 18, 2001.



Bob A. Hager, Shareholder (Cleveland, Ohio) presented Drafting Construction Contracts at The Forum, in Cleveland, Ohio. The seminar was sponsored by the Ohio State Bar Association and The Cleveland Institute.



If you are interested in having a speaker from BDB make a presentation to your organization, please contact: Cheryl Warren, Director of Client Relations and Marketing at cwarren@bdblaw.com or 800.686.2825 ext. 546.


At BDB we are always improving our processes so that we operate efficiently and effectively. Please let us know how you like our new broadcast format. E-mail: bdb@bdblaw.com Phone: 330.258.6473 Fax: 330.252.5473. 
Thank you.

Attorneys & Counselors at Law Akron • Boca Raton • Canton • Cleveland • Columbus • Naples www.bdblaw.com Toll-Free Numbers: 1.800.686.2825 – Ohio Offices 1.800.682.2825 – Boca Raton, Florida Office 1.800.782.2825 – Naples, Florida Office