Numerous lessons can be gleaned from the rather curious case of MADFAN, Inc. v. Makris, 2017-Ohio-979, which was recently decided by Ohio’s Eighth Appellate District Court of Appeals. The Eighth District covers Cuyahoga County/Cleveland.
This was a typical case of investors getting screwed over by an unscrupulous businessman. Investors Fred Cieslik, Andrew Peloza, Alexander Stewart and Michael Allen MADFAN, Inc., all of whom were represented by comedian-turned-attorney Michael Cheselka, sued Dino Makris and Michael Westerhaus for fraud and civil conspiracy. They invested in a restaurant with Makris, though Makris’s contribution was made through what appears to be essentially a shell corporation (he had creditors chasing him). Westerhaus, a lawyer who represented himself, provided continuing legal services to the restaurant. It is unclear from the opinion what Westerhaus allegedly did wrong, but the investors got a jury verdict of $300,000 against him. It is also not clear what happened with Makris, but Makris did not appeal.
Only Westerhaus appealed. He argued that the investors failed to adequately establish damages at trial. The Court of Appeals began by noting that the Appellees (the investors) failed to file an appellate brief. They were listed as having a lawyer, and they obviously had a decent amount of money and could afford representation, so it is odd to me that they didn’t file a brief. In accordance with App.R. 18(C), the Court of Appeals accepted Westerhaus’s statements of facts and issues in his brief as correct and reversed the judgment because his brief reasonably appeared to sustain such action based on the trial record. However, the Court expounded on its reasoning for overturning the verdict.
The Court noted that “[a]s much emphasis as the shareholders placed on Westerhaus’s alleged wrongdoing, none of that matters with respect to measuring damages for the alleged wrongful acts of the defendant. This appeal solely hinges on whether the shareholders presented sufficient evidence to sustain the $300,000 judgment entered in their favor.” The Court then went through the evidence:
The only evidence of damages presented to the jury was the shareholders’ initial purchase of the MADFAN shares totaling $87,000 and the $41,500 the shareholders loaned to the corporation pursuant to the meeting of the directors (the directors included three of the shareholders) on May 21, 2007. The jury’s award of $300,000 in damages, therefore, was demonstrably speculative.
There is no other evidence supporting that award, further punctuated by the fact that plaintiffs’ counsel could not even offer a number or method of calculating damages during closing argument. Carey v. Down River Specialties, Inc., 8th Dist. Cuyahoga No. 103595, 2016-Ohio-4864, ¶ 29; Kinetico, Inc. v. Indep. Ohio Nail Co., 19 Ohio App.3d 26, 30, 482 N.E.2d 1345 (8th Dist.1984). The shareholders’ claims for (1) lost profits (2) unpaid salaries, (3) $65,000 in rent arrearage paid by MADFAN, (4) Makris’s purchases of food under MADFAN’s accounts for other business ventures, and (5) Makris’s self-paid consulting fees were discussed at trial, but the shareholders failed to provide the jury a reasonable guide to computing an itemized value for those damages. The jury was left to speculate what the profits should have been or what salaries should have been paid.
Further demonstrating the speculative nature of the final judgment, the shareholders’ trial counsel invited the jury to award an indeterminate amount of damages to cover future debts should an unknown creditor ever seek repayment from the shareholders for unsubstantiated debts of MADFAN. Fisher v. Univ. of Cincinnati Med. Ctr., 10th Dist. Franklin No. 14AP-188, 2015-Ohio-3592, ¶ 22 (future damages cannot be based on a mere guess or speculation; there must be some data on which a reasonable estimate of future expenses can be derived).
Irrespective of that invitation to speculate, the only damages evidence of itemized or quantified damages introduced at trial was incomplete. As the jury was unambiguously instructed, the damages sought upon the fraud and civil conspiracy claims were “the actual damage directly caused by the fraud. The measure of damages in this case is the difference between the represented value and the actual value at the time of the transaction.” Tr. 258:2-5, 260:11-14. “Actual damages” are not to be confused with a measure of those damages. Actual damages are defined as compensation for actual and real loss or injury. Whitaker v. M.T. Automotive, Inc., 111 Ohio St.3d 177, 2006-Ohio-5481, 855 N.E.2d 825, ¶ 18. The measure of damages, on the other hand, is the mechanism the jury uses to calculate the actual damages.
The Court cited the Restatement of the Law 2d of Torts, concluding that the investors failed to demonstrate the current value of their shares (which, in turn, meant they had not shown what the diminution in share value had been). The Court did not believe it was reasonable for the jury to simply conclude that the shares were worthless based only on the evidence that (1) Andrew, who worked approximately 80 hours per week, was not getting paid his salary “most of the time”; (2) none of the shareholders were receiving their share of the profits; (3) Olympic Investment was charging back rent for a two-year arrearage, pursuant to a lease that was executed without appellees’ knowledge; (4) Makris was paying himself “consulting fees”; and (5) Makris was caught purchasing food for one of his other restaurants on MADFAN’s account. It also was not enough that creditors were suing MADFAN and individual shareholders for unpaid bills, that the state of Ohio revoked its liquor license because MADFAN had not paid taxes, that Andrew testified that “there was no money in the business” or that the building was being foreclosed on.
The Court ultimately ruled:
Any damages caused by the alleged fraud and based on the value of the stock are impossible to determine and cannot be deduced from the fact that the restaurant ceased operations. Future business is but one factor to consider in determining the value of an investment into a corporate entity. In allowing the jury to consider a conclusion on the damages stemming from the shareholders’ initial investment, the jury was required to speculate as to the value of those shares at the time of trial with no evidence of corporate assets, liabilities, or receivables. The evidence of damages from diminution in the value of the shares owned by the shareholders was not ascertainable based on the evidence in the record.
As a result, the Court found that the investors had failed to prove each element of their claims and reversed and vacated the $300,000 verdict. The lesson is clear – research the case law before trial and be prepared to establish your damages as Ohio law requires.