Penn, LLC et al v. Prosper Business Development Corporation, et al
Filing
179
ORDER granting in part and denying in part 119 Defendants' Motion for Partial Summary Judgment on claims barred by res judicata. Signed by Judge Gregory L Frost on 2/8/13. (sem1)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION
PENN, LLC, et al.,
Plaintiffs,
Case No. 2:10-cv-0993
JUDGE GREGORY L. FROST
Magistrate Judge Terence P. Kemp
v.
PROSPER BUSINESS DEVELOPMENT
CORPORATION, et al.,
Defendants.
OPINION AND ORDER
This matter is before the Court upon Defendants’ motion for partial summary judgment
on claims barred by res judicata (ECF No. 119), Plaintiffs’ memorandum contra (ECF No. 134),
and Defendants’ reply memorandum in support of their motion (ECF No. 139). For the reasons
set forth below, the Court GRANTS IN PART AND DENIES IN PART Defendants’ motion.
I.
Background
This case is a contentious commercial dispute. Plaintiff Penn, LLC (“Penn”) filed this
action on behalf of itself and derivatively on behalf of Plaintiff BigResearch, LLC (“Big
Research”), a limited liability company of which Penn and Defendant Prosper Business
Development Corporation (“Prosper”) were members. Penn alleges that Defendants improperly
transferred and diverted assets, revenues, and business opportunities of Big Research for the
benefit of Prosper.
Penn is a Delaware limited liability company with its principal place of business in Will
County, Illinois. Prosper is an Ohio corporation based in Worthington, Ohio. Penn and Prosper
collaborated in October 2000 to form Big Research, each of them being equal owners. Big
Research was formed as a company in the business of conducting survey research.
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An Operating Agreement executed by Penn and Prosper governed the business and
affairs of Big Research. Under the Operating Agreement, Defendant Prosper controlled the dayto-day activities of Big Research. As for governance, Big Research was to be governed by a
Board of Members consisting of Phillip Rist, Gary Drenik, and a representative from Penn. Rist
and Drenik are executives who control Prosper. Defendants Prosper, Drenik, and Rist were
responsible for, among other things, preparing and complying with the annual budget of Big
Research. The Operating Agreement required the Board Members to approve unanimously all
“major financial decisions.”
When formed, Big Research was owned equally by Penn and Prosper. After its
inception, and in order to infuse cash into the company’s operation, Big Research sold 5.22% of
its membership units to outside investors, thereby reducing Penn’s and Prosper’s membership
interests in Big Research to 47.39% each. The outside member interests, coupled with seeds of
discontent that materialized as between Penn and Prosper, led to multiple Big Research
resolutions entered into in 2004 that underlie many of the contentions between the parties in this
litigation. In particular, Big Research adopted a resolution that changed the requirement for
approval of all major financial decisions from a unanimous vote of the Board of Members to a
majority vote. Rist, Drenik, and the outside investors voted in favor of this resolution; neither
Penn nor its CEO, Jaffer Ali, voted on it.
Later in 2004, Big Research (again without Penn’s vote) adopted resolutions that
mandated a cash contribution by a member when there was a failure to provide an “in kind” or
non-cash contribution. Based on this resolution, Big Research deemed Penn to have forfeited its
interest in the company, retroactive to January 1, 2004.
2
Pursuant to the Operating Agreement, Penn demanded arbitration in May 2004 with
regard to the matters adopted in the controversial resolutions. More than one year later, Penn
filed a complaint in the Cook County, Illinois, Circuit Court seeking to compel Big Research and
Prosper to arbitrate. More than two years after that, in December 2007, Penn, Prosper, Big
Research, Robert Kamerschen, Robert J. Massey, John J. Perrini, Michael H. Perrini IRA, and
Sino Marketing, Ltd., entered into a separate agreement to submit their ongoing disputes to
arbitration in accordance with Article XI of the Big Research Operating Agreement. (ECF No.
119-1, at PAGEID# 3521-25.) Kamerschen, Massey, Perrini, and Perrini IRA were part of an
investment group that obtained membership units in Big Research; Sino was an affiliated
company of Prosper to which Prosper assigned certain membership rights. Neither Rist nor
Drenik was a party to the arbitration.
In an arbitration award issued in September 2008, Arbitrator David Rimstadt agreed with
Penn that several resolutions of Big Research’s Board were “invalid, null and void,” including
the resolution that divested Penn of its ownership interest in Big Research and removed Penn’s
representative from Big Research’s Board. The arbitrator ordered Big Research to pay Penn its
proportionate distributions that Big Research had paid to other members during the period that
Penn was improperly divested of its membership interest. The arbitrator later appointed a special
master to determine the amount of distributions and/or damages owed to Penn.
Following the special master’s report, the arbitrator issued a decision finding that either
(1) Prosper could “voluntarily tender” $777,917.13 to Penn or (2) if Prosper chose not to
“voluntarily tender its funds,” Big Research shall pay $1,488,000.00 to Penn as “damages for
improper distributions it made” prior to the arbitration award in September 2008. The Franklin
County (Ohio) Court of Common Pleas confirmed the award, albeit modifying it to allow
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Prosper to satisfy the award by paying $702,917.13 plus interest by November 10, 2011.
BIGresearch, LLC v. Penn, LLC, No. 10CVH-05-7420 (Franklin Cty. C.P. Ct. Nov. 1, 2010).
The arbitrator also ordered Big Research to reimburse Penn $25,000.00 for a partial
reimbursement of Penn’s attorneys’ fees. The state court confirmed this part of the arbitrator’s
award. See BIGresearch, LLC v. Penn, LLC, No. 10CVH-05-7420 (Franklin Cty. C.P. Ct. Sept.
9, 2011).
At some point during the pendency of the various arbitration and litigation proceedings
between these parties, Prosper purchased some of the outside investors’ membership interests in
Big Research, ultimately making Prosper the holder of 50.71% of Big Research’s membership
interests. One outside investor, Kamerschen, remained a 1.9% equity holder until November
2009, when he requested to withdraw as a member of Big Research. Kamerschen’s withdrawal
was approved by a majority vote of Big Research’s Members. By a majority vote (with Penn
voting against), the Board Members voted in December 2009 to dissolve Big Research and not to
continue Big Research’s operations after Kamerschen’s withdrawal.
Seven months before it filed the instant case in this Court, Penn filed suit in the Franklin
County (Ohio) Court of Common Pleas to enjoin the dissolution and winding up of the affairs of
Big Research and seek an order requiring Big Research to turn over all of its business books for
an accounting. Penn, LLC v. BigResearch, LLC, No. 10-cv-2909 (Franklin Cty. C.P. filed Feb.
24, 2010). Penn named as defendants in the lawsuit, Big Research, Prosper, Rist, and Drenik.
Big Research moved for partial summary judgment, asking the state court to determine whether
the withdrawal of Kamerschen was a “dissolution event” and whether Prosper was entitled to
wind up Big Research pursuant to the terms of the Operating Agreement. Though it had sued in
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the state court to enjoin the dissolution of Big Research, Penn ultimately withdrew its objection
to the winding up.
On December 12, 2011, the state court granted partial summary judgment on the issues of
Kamerschen’s withdrawal being a dissolution event and the winding up of Big Research. Penn,
LLC v. Big Research, LLC, No. 10-cv-2909 (Franklin C.P. Ct. Dec. 12, 2011) (Decision and
Judgment Entry). The state court “declared that (1) the withdrawal of Kamerschen was a
dissolution event; and (2) pursuant to the Big Research Operating Agreement, Prosper is entitled
to wind-up [sic] Big Research.” Id.
During the pendency of the state court action, Penn filed this lawsuit. Suing on behalf of
itself and Big Research, Penn’s Complaint alleged a violation of the Racketeer Influenced and
Corrupt Organizations Act (RICO) (Count One), fraud (Count Two), conversion/unjust
enrichment (Count Three), and breach of fiduciary duties (Count Four). Following this Court’s
grant of motions to dismiss certain claims and parties from this action, the only claims that
remain are those for conversion/unjust enrichment and breach of fiduciary duties as against
Defendants Prosper, Rist, and Drenik.
II. Discussion
Defendants move for partial summary judgment on certain claims raised in Penn’s
Complaint. Summary judgment is 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). The moving party has the burden of showing an absence of evidence to support the nonmoving party’s case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S. Ct. 2548, 91 L. Ed. 2d
265 (1986). Once the moving party has met its burden of production, the non-moving party must
present significant probative evidence to defeat the motion for summary judgment. Anderson v.
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Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). The mere
existence of a scintilla of evidence to support the non-moving party’s position will be
insufficient; the evidence must be sufficient for a jury to reasonably find in favor of the
nonmoving party. Id. at 252.
In the motion before the Court here, Defendants seek partial summary judgment on the
basis of res judicata. The term res judicata refers to the doctrines of issue preclusion and claim
preclusion. Taylor v. Sturgell, 553 U.S. 880, 892, 128 S. Ct. 2161, 171 L. Ed. 2d 155 (2008).
Both doctrines, when applicable, give preclusive effect to a final judgment previously rendered.
Under claim preclusion, “a final judgment forecloses ‘successive litigation of the very same
claim, whether or not relitigation of the claim raises the same issues as the earlier suit.’” Id.
(quoting New Hampshire v. Maine, 532 U.S. 742, 748, 121 S. Ct. 1808, 149 L. Ed. 2d 968
(2001)). In contrast, issue preclusion bars “ ‘successive litigation of an issue of fact or law
actually litigated and resolved in a valid court determination essential to the prior judgment,’
even if the issue recurs in the context of a different claim.” Id. (quoting New Hampshire, 532
U.S. at 748-49).
When the prior court proceeding is a state proceeding, the federal courts must give it the
same res judicata effect that it would have in that state’s courts. 5455 Clarkins Drive, Inc. v.
Poole, 384 F. App’x 458, 462 (6th Cir. 2010) (citing Allen v. McCurry, 449 U.S. 90, 96, 101 S.
Ct. 411, 66 L. Ed. 2d 308 (1980)). In Ohio, as in the federal system, the doctrine of res judicata
encompasses claim preclusion and issue preclusion. Id. (citing State ex rel. Nickoli v. Erie
MetroParks, 124 Ohio St. 3d 449, 2010-Ohio-606, 923 N.E.2d 588, 592 (Ohio 2010). “‘Claim
preclusion prevents subsequent actions, by the same parties or their privies, based upon any
claim arising out of a transaction that was the subject matter of a previous action,’ whereas issue
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preclusion, or collateral estoppel, ‘precludes the relitigation, in a second action, of an issue that
had been actually and necessarily litigated and determined in a prior action that was based on a
different cause of action.’” State ex rel. Nickoli, at & 21 (quoting Ft. Frye Teachers Assn.,
OEA/NEA v. State Emp. Relations Bd., 81 Ohio St.3d 392, 395, 692 N.E.2d 140 (Ohio 1998)).
As to claim preclusion, the doctrine applies not only to what was determined in the prior action,
but also to every claim which might have been raised in the earlier proceeding. Grava v.
Parkman Twp., 73 Ohio St. 3d 379, 382, 653 N.E. 2d 226 (Ohio 1995).
A. The State Court Litigation
In the first branch of their motion, Defendants ask this Court to give res judicata effect to
the judgment rendered by the Franklin County (Ohio) Court of Common Pleas in an action that
Penn commenced in 2010. In that state court action, Penn’s two-count Complaint sought (1) an
injunction to prevent the winding up and dissolution of Big Research and (2) an injunction
ordering Defendants to comply with the Big Research operating agreement and to provide full
disclosure of Big Research’s books and records. (ECF No. 119-2, at PAGEID# 3690-3700.)
Ultimately, the state court determined on summary judgment that Prosper was entitled to wind
up Big Research. (ECF No. 119-2, at PAGEID# 3853-54.) Defendants argue that both the
“claim preclusion” and “issue preclusion” branches of the res judicata doctrine bar Penn’s
claims, to the extent it bases them upon the allegedly wrongful dissolution of Big Research.
Defendants also argue that any claim by Penn that Defendants usurped business opportunities
from Big Research after dissolution is barred by res judicata.
1. Dissolution of Big Research—Claim Preclusion
Claim preclusion requires four elements: “(1) a prior final, valid decision on the merits by
a court of competent jurisdiction; (2) a second action involving the same parties, or their privies,
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as the first; (3) a second action raising claims that were or could have been litigated in the first
action; and (4) a second action arising out of the transaction or occurrence that was the subject
matter of the previous action.” Hapgood v. City of Warren, 127 F.3d 490, 493 (6th Cir. 1997)
(applying Ohio law) (citation omitted); see also Portage Cty. Bd. of Comm’rs. v. City of Akron,
109 Ohio St. 3d 106, 2006-Ohio-954, 846 N.E. 2d 478, at & 84.
Defendants argue that all four elements are met here. There is no genuine dispute as to
the first two elements: there was a prior, final, and valid decision on the merits in the state court
action and the state court action involved the same parties as this case.1 As to the final two
elements, Defendants frame the issue by noting that the “transaction or occurrence” forming the
subject matter of the state court action was the “dissolution of Big Research.” (ECF No. 119, at
PAGEID# 3506.) Indeed, Penn filed the earlier state court action to obtain injunctive relief to
prevent Prosper from winding up and dissolving Big Research. Among other things, Penn’s state
court lawsuit alleged that Defendants’ actions to dissolve and wind up Big Research “breached
their contractual obligations as well as their duty of good faith and fair dealing and their
fiduciary duties to Penn.” (ECF No. 119-2, at & 25, PAGEID# 3697.) Thus, Penn sued in state
court to enjoin the dissolution of Big Research, under the legal theory that Defendants were in
breach of contractual and fiduciary duties owed to it.
Based on a comparison of the state court complaint and the claims asserted in this case,
the Court concludes that claim preclusion applies to bar Penn’s claims in this lawsuit, insofar as
they are based on the dissolution of Big Research. In this lawsuit, Penn asserts that Defendants’
dissolution and winding up of Big Research was self-dealing and a breach of fiduciary duty.
1
The state court disposed of the prior action on summary judgment. Under Ohio law, a summary
judgment is considered a judgment on the merits, triggering the doctrine of res judicata if a subsequent
suit is filed based on the same transaction or occurrence. See State ex rel. Hensley v. City of Columbus,
10th Dist. No. 10AP-840, 2011-Ohio-3311, at & 14.
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(Compl. & 148(j), ECF No. 2 at PAGEID# 25.) Thus, Penn is seeking relief in this case based on
the same transaction or occurrence that formed the basis of the state court lawsuit—the purported
breach of contract and fiduciary duties alleged to have taken place with respect to the dissolution
of Big Research.
In arguing against application of res judicata, Penn attempts to minimize the reach of the
state court’s ruling. Emphasizing that it filed the state court action “as an injunction action to
prevent Big Research and Defendants from winding up Big Research,” Penn argues that the state
court “simply found that ‘Prosper was entitled to wind-up’ Big Research. No finding was made
as to whether Defendants acted appropriately in the wind up of Big Research, which was and is
on-going.” (ECF No. 134, at PAGEID# 4987.) Penn goes on to argue that the state court did not
find that the dissolution was “lawful.” (Id.)
Penn’s arguments miss the point and conflate concepts of claim preclusion and issue
preclusion. For one thing, Penn’s arguments concerning the appropriateness of Defendants’
actions in winding up Big Research are not the subject of Defendants’ motion for summary
judgment on res judicata grounds. Defendants ask the Court to grant summary judgment on res
judicata grounds as to claims “challenging the validity of the December 2009 dissolution of Big
Research.” (ECF No. 119, at PAGEID# 3496.) As Defendants themselves point out in their
reply brief in support of their motion for summary judgment—
any suggestion by Penn that there was no finding in the [state court litigation] as
to whether the Defendants acted appropriately in the ongoing winding-up of Big
Research misses the point. Defendants’ Motion for Partial Summary Judgment is
not premised upon the notion that every action taken by the Defendants while
winding up the affairs of Big Research was decided in the [state court litigation].
Rather, the point of Defendants’ Motion is that Penn is precluded from
challenging the lawfulness of Big Research’s dissolution and the legal
ramifications thereof.
(ECF No. 139, at PAGEID# 5134.)
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Accordingly, Penn’s argument that issues concerning the “winding up” were not litigated
in the state court action is inconsequential. The matters related to the “winding up” (as
Defendants themselves frame the issue) are not the same “transaction or occurrence” as the
dissolution of Big Research itself. It is Penn’s claims related to the dissolution that are barred by
claim preclusion. Claims related to any breach of fiduciary duty occasioned by Defendants’
actions in winding up Big Research—actions taken after the dissolution—are not barred.
In any event, Penn’s emphasis on what was or was not actually litigated before the state
court is not relevant to a claim preclusion analysis. When applicable, the doctrine of claim
preclusion bars not only those matters that were litigated in a prior action, but also those that
arise out of the same transaction or occurrence that might have been raised in the prior action.
See Grava, 73 Ohio St. 3d at 382. Thus, even if Penn is correct in its argument that the state
court did not find that the dissolution of Big Research was “lawful” or a breach of fiduciary duty
(ECF No. 134, at PAGEID# 4987), the fact that there was no such determination made in the
prior action does not prevent claim preclusion from barring the present action, to the extent it
seeks to challenge the lawfulness of the dissolution. A challenge to the lawfulness of the
dissolution necessarily arises out of the same “transaction or occurrence” as the one that formed
the basis of the state court action—namely, the dissolution of Big Research.
For the foregoing reasons, Defendants’ arguments regarding the claim preclusion effect
of the state court action are well taken. Claim preclusion bars Penn from challenging the validity
of the December 2009 dissolution of Big Research.
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2.
Dissolution of Big Research—Issue Preclusion
Defendants also argue that issue preclusion bars Penn from challenging the lawfulness of
Big Research’s dissolution because the state court, in granting summary judgment to the
defendants, specifically ruled that Prosper was entitled to dissolve and wind up Big Research
following the specified dissolution event (i.e., the withdrawal of member Kamerschen). (ECF
No. 119, at PAGEID# 3507-08.) This finding of the “lawfulness” of Big Research’s dissolution,
argue Defendants, bars Penn from litigating whether the dissolution was a breach of fiduciary
duty.
This Court need not reach the issue of whether issue preclusion bars Penn’s claim that the
dissolution constituted a breach of fiduciary duty. Because this Court has already found above
that any challenge to the dissolution in this lawsuit is barred by claim preclusion, there is no need
for this Court to delve into the murkier issue of whether the state court resolved the precise issue
that Penn raises here (viz. whether a dissolution authorized by the operating agreement can
constitute a breach of fiduciary duty).
3. Usurpation of Business Opportunity
Defendants also argue that res judicata bars Penn from litigating any claim that
Defendants “usurped and/or converted Big Research, LLC’s survey business after its dissolution
in December 2009.” (ECF No. 119, at PAGEID# 3498.) Because the prior state court action
conclusively determined that the Big Research dissolution was “lawful,” Defendants argue that it
necessarily follows that there can no usurpation of business opportunity. Under Delaware law,
Defendants argue that once Big Research was “lawfully dissolved” (which occurred in December
2009), Big Research was authorized to do nothing other than wind up its affairs. (Id. at
PAGEID# 3510.) Thus, Defendants conclude that there could be no usurpation of business
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opportunity from Big Research because Big Research did not have the “ability or reasonable
expectancy” of conducting any business post-dissolution. (Id. at PAGEID# 3511.) The Court
construes Defendants’ “res judicata” argument here as an attempt to invoke issue preclusion—
because the state court fully litigated the issue of the lawfulness of Big Research’s dissolution,
Defendants argue that this conclusively bars any action based upon alleged post-dissolution
usurpation of business opportunity.
Penn raises a number of arguments in response to Defendants’ contentions, but the Court
need reach only one of them. Among other points, Penn notes that the usurpation of business
opportunities has not been litigated in any forum. (ECF No. 134, at PAGEID# 4992.) This point
is not only evident from the state court’s ruling granting Defendants’ motion for summary
judgment, it is entirely glossed over by Defendants’ motion for partial summary judgment here.
A necessary element of issue preclusion is that the precise issue has been necessarily and
actually litigated in a prior proceeding. See State ex rel. Nickoli, supra, 124 Ohio St. 3d 449, at
& 21. The issue litigated in the state court action was whether Defendant Prosper was entitled to
dissolve Big Research. The effect of that dissolution on other issues, including the question of
whether business opportunity could be usurped from Big Research post dissolution, is a separate
matter that was not within the scope of what was litigated in the state court action. Defendants
therefore cannot use the doctrine of res judicata/issue preclusion to bar Penn from litigating
whether Defendants usurped business opportunities from Big Research during the period of time
following Big Research’s dissolution in December 2009.
This Court is mindful of the fact that the parties have raised numerous arguments relating
to the substantive issue of whether a dissolved entity can, as a matter of law, have business
opportunities usurped from it. Defendants argue that it cannot as a matter of law; Penn argues
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that is not so and that the usurpation of business opportunities from Big Research is a question
for the trier of fact. Defendants’ motion for partial summary judgment, however, sought
summary judgment only on the basis of res judicata. (ECF No. 119, at PAGEID# 3496-99.)
With the Defendants having framed the summary judgment issue as solely one of res judicata,
the Court declines to delve into the substantive merits of whether Defendants are entitled to
partial summary judgment on some other basis with respect to the usurpation of business
opportunities issue.
B. The Arbitration
In the second branch of their motion, Defendants ask the Court to give res judicata effect
to the decision rendered by the arbitrator in a prior arbitration convened before Arbitrator David
Rimstadt in 2008. The arbitration order was later confirmed in state court. Bigresearch, LLC v.
Penn, LLC, No. 10CVH-05-7420 (Franklin C.P. Ct. Sept. 9, 2011) (Decision and Final
Judgment). Under Ohio law, an arbitration confirmed by a state court having jurisdiction over
the matter is entitled to the same preclusive effect as any judgment in a court action. See Ohio
Rev. Code § 2711.14.
Defendants argue that the prior arbitration bars Penn from litigating the “validity” of any
Big Research transaction occurring before September 15, 2008. (ECF No. 15, at PAGEID#
3512.) Emphasizing the arbitrator’s appointment of a special master to audit the books and
records of Big Research after the arbitrator’s September 15, 2008 decision, Defendants argue
that the arbitrator’s later adoption of the special master’s findings regarding the accounting she
performed forecloses further litigation or challenge to “any transaction that was the subject of the
prior accounting.” (Id. at PAGEID# 3513.) Defendants further argue that the arbitration
likewise bars Penn “from challenging the reasonableness of the payments made by Big Research
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after September 2008 for executive compensation.” (Id.) Defendants are incorrect on both
counts: there is no such bar.
As an initial matter, the Court notes that Defendants’ arguments with respect to the
arbitration invoke only the issue preclusion branch of res judicata. Defendants cite Ohio law for
the proposition that an arbitration award has the same preclusive effect as a judgment “for the
matters it decided.” (Id. at PAGEID# 3511 (emphasis added).) This argument sounds in issue
preclusion rather than claim preclusion. Moreover, Defendants’ focus on the “full and complete
accounting” performed in connection with the arbitration award solidifies that Defendants are
arguing that issues fully and actually litigated in the arbitration should be barred for that reason,
as opposed to being barred because they “could have” been litigated in the arbitration (i.e., a
concept of claim preclusion). Accordingly, this Court treats Defendants’ arguments with regard
to the res judicata effect of the arbitration as invoking the issue preclusion doctrine.
To bar relitigation of an issue under the issue preclusion doctrine, four requirements must
be met under Ohio law: (1) there must be a final judgment on the merits in the previous case
after a full and fair opportunity to litigate the issue; (2) the issue must have been actually and
directly litigated in the prior suit and must have been necessary to the final judgment; (3) the
issue in the present suit must have been identical to the issue involved in the prior suit; and (4)
the party against whom estoppel is sought was a party or in privity with a party to the prior
action. Kovacic v. Cuyahoga Cty. Dep’t of Children and Family Servs., 809 F. Supp. 2d 754,
772 (N.D. Ohio 2011) (citing Cashelmara Villas Ltd. P'ship v. DiBenedetto, 87 Ohio App. 3d
809, 623 N.E.2d 213, 215 (Ohio Ct. App. 1993)). In addition, the burden is upon the party
seeking to invoke issue preclusion to prove that all the elements of the doctrine apply. Id.
The elements are not met in this case.
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The Court’s analysis begins and ends with the crucial element that an identical issue has
been actually litigated in a prior proceeding. Defendants have failed to convince the Court that
the precise issue raised here is the same as the one resolved in the special master’s “accounting”
adopted by the arbitrator. The arbitrator did not decide the precise issue of whether each
transaction of Big Research prior to September 15, 2008, was a valid one. Though Defendants
argue that the arbitrator ordered an accounting that was “broad in scope” in his September 15,
2008 ruling, the order must be viewed in the context of what was awarded to Penn. In the
portion of his decision in which he ordered that to which Penn was entitled, the arbitrator found:
IT IS FURTHER ORDERED that BIGresearch make redistribution to
PENN of 47.39% of all prior distributions of profits made by BIGresearch to its
other investors. This profit redistribution shall be paid from future profit
distributions. No future profits shall be distributed to any investor other than
PENN until the full amount of redistributed profits owed to PENN is paid in full.
The amount of prior profit redistribution has not been determined. PENN
asserts that all money paid to Prosper is a return on investment. Prosper asserts
that every dime it has received is payment for wages/salaries or for accrued
wages/salaries. What is known is that there has been $2,539,435.55 in payments
to Sino and Prosper entities through year end 2006. It is also known that
payments of $3,550 were made to Kamerschen through the end of 2006. No other
distributions had been made to other investors through year end 2006. There is
insufficient evidence at this time to determine what part, if any, of those payments
was a profit distribution by BIGresearch to its investors.
(ECF No. 119-1, at PAGEID# 3643 (emphasis added; citation to record omitted).)
The order that Big Research make “redistribution” of profits followed naturally from the
arbitrator’s key ruling that certain resolutions passed by the Big Research board (which was
controlled by Defendants Rist and Drenik) were “invalid, null and void” and that Penn had never
relinquished its ownership interest in Big Research. (Id. at PAGEID# 3642.) In the same
decision, the arbitrator went on to order a full accounting of Big Research’s “receipts, payments,
accruals and allocations of profits and losses to date” (i.e., September 15, 2008). (Id. at
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PAGEID# 3644.) But this “full accounting” ordered by the arbitrator must be viewed in the
context of the rest of the order. The purpose of the “full accounting” was to determine the
amount of profit “redistribution” that Big Research was required to give Penn. The accounting
was not, as Defendants argue, designed to address the validity of any and all of Big Research’s
transactions before September 15, 2008.
The issue that Penn raises in this case is whether Defendants Prosper (as the
management company of Big Research), Drenik, and/or Rist breached their fiduciary duties
owed to Penn and/or Big Research. The “full accounting” ordered and adopted by the arbitrator
in the prior arbitration did not resolve that issue. Accordingly, Defendants are not entitled to use
issue preclusion to bar relitigation of fiduciary duty claims that may relate to Big Research
transactions occurring prior to September 15, 2008.
Defendants also ask the Court to apply issue preclusion to bar Penn from litigating
whether the executive compensation paid to Defendants Drenik and Rist was unreasonable and
therefore actionable as a breach of fiduciary duty owed to Penn and/or Big Research.
Defendants contend that the reasonableness of the executive compensation paid to Drenik and
Rist was specifically litigated in the arbitration proceeding. In support of their contention,
Defendants note that (1) Penn specifically challenged the amount of executive compensation in
its “Second Statement of Claims” submitted to the arbitrator (ECF No. 119, at PAGEID#3513),
(2) the arbitrator “specifically held” that levels of executive compensation existing on September
15, 2008 were reasonable and in the bottom quartile of similarly situated executives (id.), and (3)
the arbitrator did not declare the executive compensation excessive or invalid in issuing his final
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arbitration award (ECF No. 139, at PAGEID#5150).2 Upon examination, however, the Court
disagrees with Defendants on this point: issue preclusion does not apply to the executive
compensation issue.
Among the fiduciary duty issues Penn seeks to litigate in this case is “whether the
executive compensation received by Drenik and Rist violated their fiduciary duties owed to
Plaintiffs.” (ECF No. 134, at PAGEID# 4986.) Though Defendants make much of the fact that
Penn filed a “Second Statement of Claims” in the arbitration that placed Drenik’s and Rist’s
executive compensation at issue, the issue raised by Penn in this case is not the same issue that
was litigated in the arbitration. In that Second Statement of Claims, Penn raised the executive
compensation issue in the context of claims related to the approval of Big Research’s 2008
budget. (ECF No. 119-1, at PAGEID#3653.) More specifically, Penn took the position that the
2008 budget was void because it was a “major financial decision requiring the approval of all
three Board Members,” which had not happened. (Id. at PAGEID# 3655.) Because the 2008
budget increased the level of Drenik’s and Rist’s executive compensation, Penn challenged the
validity of the increase, seeking a “declaratory finding” that no Big Research executive could
receive more than $100,000 per year in total compensation. (Id. at PAGEID# 3655-56.) Thus,
the issue Penn placed before the arbitrator was not necessarily the reasonableness of the
executive compensation, much less whether the level of compensation was a breach of fiduciary
2
In the memorandum in support of their motion for summary judgment, Defendants also cite the fact that
the arbitrator “rejected” Penn’s claims that certain amounts paid by Big Research to Prosper for “shared
expenses” were unreasonable and should have been deemed “qualifying distributions” for purposes of
assessing the amount of profit “redistribution” to which Penn was entitled. (ECF No. 119, at
PAGEID#3514.) To be sure, the arbitrator deferred to the special master’s finding that certain shared
operating expenses paid by Big Research were “market rate regardless of whether Prosper . . . received
benefit from the payment of such expenses.” (ECF No. 119-1, at PAGEID# 3675.) The Court does not,
however, view this finding by the arbitrator to be germane to the executive compensation issue. It is
evident from the arbitrator’s determination that the “shared expenses” determination was an issue separate
from the executive compensation issue.
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duty. Rather, the issue was whether the 2008 increase in executive compensation to Rist and
Drenik was void because the increase was implemented by means of a void budget approval.
Nor does the arbitrator’s May 2010 decision touted by Defendants support application of
issue preclusion. Citing to the arbitrator’s May 5, 2010 order, Defendants contend that the
arbitrator “specifically held that the ‘levels of executive compensation existing on September 15,
2008 to be reasonable from an accounting standpoint,’ and were in fact, ‘in the bottom quartile of
similarly situated executives.’” (ECF No. 119, at PAGEID# 3513 (quoting ECF No. 119-1, at
PAGEID# 3675).) But Defendants’ argument is slightly misleading. The portion quoted by
Defendants comes from a passage that reads in its entirety:
Penn has resolved to prove that executive compensation in excess of . . . the
original Operating Agreement should be considered as additional qualifying
distributions. The complained of executive compensation is in the bottom
quartile of similarly situated executives. The Master concluded that levels of
executive compensation existing on September 15, 2008 to be reasonable from an
accounting standpoint. Thus, what remains to be determined in the hearing on the
Second Statement of Claims is not whether BIGresearch managers failed to use
their best business judgment in increasing executive salaries, but rather, whether
such increases are related to previously undisclosed evidence, and, if so, whether
such increases in executive compensation are allowed in the absence of
unanimous Board of Members approval. Any challenged executive compensation
payments were made to individuals and not to any Member. Therefore, the
arbitrator will not consider any payments for executive compensation as a
qualifying distribution for resolution by this Order.
(ECF No. 119-1, at PAGEID# 3675.)
Thus, the May 5, 2010 order determined only that the increase in executive compensation
should not be considered a “qualifying distribution” for purposes of determining the amount of
profit redistribution due Penn under the arbitrator’s September 15, 2008 order. Though he noted
that the executive compensation was “reasonable” in the judgment of the special master, the
arbitrator did not decide whether the increase in compensation was a breach of fiduciary duty by
any of the Defendants in this case. Whether executive compensation was reasonable “from an
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accounting standpoint” is not necessarily the same issue as whether it was reasonable from a
fiduciary duty standpoint. The latter issue was simply not before the arbitrator.
For these reasons, Defendants are not entitled to summary judgment based on the res
judicata/issue preclusion effect of the previous arbitration.
III. Conclusion
For the reasons set forth above, the Court GRANTS IN PART AND DENIES IN
PART Defendant’s motion for partial summary judgment on grounds of res judicata. The claim
preclusion branch of res judicata bars Penn from litigating any claims challenging the validity of
the December 2009 dissolution of Big Research. The Court denies Defendants’ motion in all
other respects.
IT IS SO ORDERED.
/s/ Gregory L. Frost
GREGORY L. FROST
UNITED STATES DISTRICT JUDGE
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