Jack v. Grose

Filing 82

ORDER denying (28) Motion to Dismiss in case 2:16-cv-00633-ALM-KAJ. Signed by Judge Algenon L. Marbley on 3/5/2018. Associated Cases: 2:16-cv-00633-ALM-KAJ, 2:17-cv-00808-ALM-KAJ (cw)

IN THE UNITED STATES DISCTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION

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JOHN JACK, et al.,
Plaintiffs,
v.
SOUTH PARK VENTURES, LLC, et al.,
Defendants.

Case No. 2:16-CV-0633
JUDGE ALGENON L. MARBLEY
Magistrate Judge Kimberly A. Jolson

OPINON AND ORDER
This matter comes before the Court on Defendants’ Motion to Dismiss Pursuant to
Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) (ECF No. 28). Defendants seek to
dismiss Count Two of the Second Amended Complaint, which alleges that Defendants breached
fiduciary duties. For the reasons set forth below, the Court DENIES Defendants’ Motion to
Dismiss.
I.
A.

BACKGROUND
Factual Background1

Water Energy Services, LLC (“WES”) is a limited liability company that was created to
operate Class II injection wells for disposal of wastewater generated by the oil and gas industry
in the Appalachian Basin. (ECF No. 27 at ¶¶ 15-16). Fifty-percent (50%) of WES’ membership
interest is owned by Defendant South Park Ventures, LLC (“SPV”), which is owned in part and

In adjudicating this motion to dismiss, the Court accepts as true all well-pleaded factual
allegations from the second amended complaint. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009).

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controlled by Defendant Dean Grose. (Id. at ¶¶ 5, 7). The remaining fifty-percent (50%) of
WES’ membership interest is owned by Plaintiff Tri-State Disposal, LLC (“Tri-State”). (Id. at ¶
7). Plaintiff John Jack is the manager and a member of Tri-State. (Id. at ¶ 1). Horizon Partners,
LLC (“Horizon”) is also a member of Tri-State. (Id. at ¶ 4). Jack is a member of Horizon and
holds 50% of its membership interest. (Id. at ¶¶ 1, 4). Heinrich Production, LLC (“Heinrich”)
holds the remaining 50% membership interest in Horizon. (Id. at ¶ 4).
WES is a manager-managed limited liability company and has a board with two
members—Grose, appointed by SPV, and Jack, appointed by Tri-State. (Id. at ¶ 15). Jack also
served as the CEO of WES and operated WES day-to-day, along with Noble Zikefoose, the
Senior Vice President of Operations, and Terry Clark, the Vice President of Business
Development. (Id. at ¶ 18). Grose was involved with the management of WES through his
position on the board. (Id.).
Between 2015 and 2016, WES constructed its facilities and established a customer base,
becoming fully operational by early 2016. (Id. at ¶¶ 22-24). In 2015, while WES was still
completing construction of its injection wells, Cequel Energy Capital Partners, LLC (“Cequel”)
became interested in purchasing WES. (Id. at ¶ 25, Ex. E). Cequel presented WES with a letter
of intent, offering to buy the company for an amount in excess of all debts that WES had
incurred. (Id. at ¶¶ 25, 26, Ex. E). Despite this lucrative offer, SPV and Heinrich declined to
pursue it, and instead allowed the letter of intent to expire in early 2016. (Id. at ¶ 27).
Jack and Tri-State allege that, following SPV’s refusal to pursue the offer, Grose, SPV,
and Heinrich engaged in a concerted effort to remove Jack from the board of WES, to remove
him as CEO to gain control of WES, and to deprive him of financial compensation to which he is

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otherwise entitled. (Id. at ¶ 28). Jack and Tri-State allege that Heinrich attempted to gain control
of Tri-State and Horizon and remove him from those companies as well.2 (Id.).
As a result, management of WES became deadlocked by disagreement and lack of
cooperation. (Id. at 30). Jack made several efforts to resolve the issues with Heinrich, SPV, and
Grose, including offering to sell his interest in Tri-State and Horizon to Heinrich, or offering to
buy Heinrich’s interest in Horizon, and offering to sell Tri-State’s interest in WES to SPV, or
offering to buyout SPV. (Id. at ¶¶ 32-35, 38). These efforts did not come to fruition, and
deadlock continued. Jack alleges that SPV and Grose made false statements about him,
including that he misappropriated money from WES, in order to damage his business reputation
and force him to leave WES and forgo financial benefits. (Id. at ¶¶ 41, 43).
Jack and Tri-State further allege that Grose and SPV engaged in a private negotiation with
Dolphin Capital Group, LLC to sell WES in excess of $21 million, and stated that the profits
would not be shared with Tri-State or Jack. (Id. at ¶¶ 49-51, Ex. K). On May 26, 2016, SPV
made a formal demand on Jack and Grose, as the board of managers of WES, to remove Jack for
breach of fiduciary duties, personal dishonesty, gross mismanagement, and incompetence. (Id. at
¶ 44, Ex. J). Then, on June 9, 2016, SPV sent a notice of expulsion to Tri-State, which purported
to expel Tri-State from WES altogether. (Id. at ¶ 53, Ex. L).
In December of 2016, after the above-captioned lawsuit was filed, the assets of WES were
sold to Funds Protection Investments (“FPI”), which is an entity formed and controlled by
Heinrich and Grose. (Id. at ¶¶ 58-59). FPI then sold the WES assets to Deeprock Disposal
Solutions, LLC (“Deeprock”), which is controlled by Heinrich, Grose, and SPV. (Id. at ¶ 60).

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Plaintiffs have claims pending against Heinrich in the Washing County Common Pleas Court,
Case No. 16 OT 142, which is currently stayed pending arbitration. The arbitration is currently
pending before the American Arbitration Association in Case No. 01-16-0003-7711. See ECF
No. 27 at ¶ 3.

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Deeprock terminated Jack’s employment with WES, and currently operates the disposal facility
that was formerly owned by WES. (Id. at ¶ 61).
B.

Procedural History

On June 3, 2016, Jack and Tri-State initially filed the instant action in the Court of
Common Pleas of Washington County, Ohio. (See ECF No. 1 at ¶ 1). Defendants removed the
case on June 30, 2016. (Id.).3 Plaintiffs’ complaint contained five causes of action: (1) breach of
contract; (2) request for injunctive relief; (3) request for declaratory judgment; (4) breach of
fiduciary duties; and (5) defamation resulting in libel and slander. (ECF No. 4). In July of 2016,
Defendants filed a motion to dismiss the complaint. (ECF No. 8). On March 13, 2017, this
Court issued its Opinion and Order on Defendants’ first motion to dismiss, granting it in part and
denying it in part. (ECF No. 25). Of particular relevance here, the Court allowed Plaintiffs’
breach of fiduciary duty claim to go forward against both Grose and SPV. (Id. at 23). Plaintiffs
then filed their second amended complaint on March 23, 2017. (ECF No. 27). The second
amended complaint contains three counts: (1) breach of contract; (2) breach of fiduciary duties;
and (3) defamation resulting in libel and slander. (Id.). On April 6, 2017, the Defendants filed
the instant motion to dismiss, which seeks dismissal of Count II: Breach of Fiduciary Duties.
(ECF No. 28). The matter is fully briefed and ripe for disposition.

On June 9, 2016, SPV filed suit against Jack in the Court of Common Pleas of Washington
County, Pennsylvania, alleging similar causes of action arising out of the same facts at issue
here. An amended complaint was filed in March of 2017, naming Jack, Zickefoose, and Clark as
defendants. Defendants removed that case to federal court in the Western District of
Pennsylvania, and the case was ultimately transferred to the Southern District of Ohio and
consolidated with the above-captioned matter. (See 2:17-cv-808, ECF Nos. 1, 26, 37).
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II.

LEGAL STANDARDS

The Court may dismiss a cause of action under Federal Rule of Civil Procedure 12(b)(6)
for “failure to state a claim upon which relief can be granted.”4 Such a motion “is a test of the
plaintiff’s cause of action as stated in the complaint, not a challenge to the plaintiff’s factual
allegations.” Golden v. City of Columbus, 404 F.3d 950, 958-59 (6th Cir. 2005). The Court
must construe the complaint in the light most favorable to the non-moving party. Total Benefits
Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 434 (6th Cir. 2008).
The Court is not required, however, to accept as true mere legal conclusions unsupported by
factual allegations.

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Although liberal, Rule

12(b)(6) requires more than bare assertions of legal conclusions. Allard v. Weitzman, 991 F.2d
1236, 1240 (6th Cir. 1993) (citation omitted). Generally, a complaint must contain a “short and
plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P.
8(a)(2). In short, a complaint’s factual allegations “must be enough to raise a right to relief
above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). It must
contain “enough facts to state a claim to relief that is plausible on its face.” Id. at 570.
III.

ANALYSIS

Defendants argue first that Tri-State cannot bring a fiduciary duty claim against SPV
because Pennsylvania law does not recognize a fiduciary duty from one 50% shareholder to
another, and second, that Tri-State cannot bring a fiduciary duty claim directly against Grose

Defendants style their motion as a motion to dismiss under both Rule 12(b)(6) and Rule
12(b)(1). Rule 12(b)(1) deals with lack of subject-matter jurisdiction. Defendants’ motion seeks
to dismiss the complaint for “Fail[ing] to State a Claim for Breach of Fiduciary Duties”. (ECF
No. 29 at 6). This is more appropriately analyzed as a motion under Rule 12(b)(6) for failure to
state a claim upon which relief can be granted. Indeed, Defendants make no arguments that this
Court lacks jurisdiction. (See generally ECF No. 29). Thus, the Court will apply the legal
standards for a motion to dismiss under Rule 12(b)(6).     
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because the nature of the injury requires a derivate action. (ECF No 29 at 7-8). But, as Plaintiffs
correctly point out, this Court has already decided the precise issues at bar and determined that
Plaintiff Tri-State’s fiduciary duty claim could proceed against both defendants. The Court sees
no reason to depart from its prior holding.
A.

Tri-State Properly Pleads a Direct Action.

As a general rule, under Pennsylvania’s Business Corporation Law, the duties of
corporate directors are “solely to the business corporation and may be enforced directly by the
corporation or may be enforced by a shareholder, as such, by an action in the right of the
corporation, and may not be enforced directly by a shareholder or by any other person or
group.” Pa. Cons. Stat. § 1717 (emphasis added). In other words, under Pennsylvania law, “an
action for breach of fiduciary duty may only be brought by the corporation directly, or in the
alternative, indirectly by a shareholder through a derivative action brought on behalf of the
corporation.” In re Bruno, 553 B.R. 280, 286 (Bankr. W.D. Pa. 2016) (citing Pa. Cons. Stat. §
1717); Hill v. Ofalt, 85 A.3d 540 (Pa Super 2014) (describing derivate suits). Shareholders,
creditors, and others are generally “prohibited from bringing a direct action against the directors
for a breach of their fiduciary duties.” In re Bruno, 553 B.R. at 286.
The Pennsylvania Limited Liability Company Law of 1994, which governed this action
when the previous motion to dismiss was decided, incorporated this restriction for managermanaged LLC. See In re Sobol, 545 B.R. 477, 494 (Bankr. M.D. Pa. 2016) (“[a] member of an
LLC generally only has derivative standing” to bring suit). The Pennsylvania Uniform Limited
Liability Company Act of 2016, however, replaced the 1994 Act, which was repealed in its
entirety. See Act of Nov. 21, 2016, P.L. 1328, No. 170. The new Limited Liability Act became

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effective for all LLCs on April 1, 2017. 15 P.A.C.S.A. § 8811(c). Thus, the standards have
changed. The 2016 Act provides that:
[A] member may maintain a direct action against another member, a manager or the
limited liability company to enforce the member’s rights and protect the member’s
interests, . . . [so long as the member] plead[s] and prove[s] an actual or threatened injury
that is not solely the result of an injury suffered or threatened to be suffered by the
limited liability company.
15 P.A.C.S.A. § 8881.
In any event, even under the old regime, courts held that corporate shareholders (and
LLC members) always “have standing to sue individually” so long as they “allege a direct,
personal injury—that is independent of any injury to the corporation” and are entitled to receive
the benefit of any recovery. Hill, 85 A.3d at 548; see also Fishkin v. Hi-Acres, Inc., 462 Pa. 309,
316 n.4 (Pa. 1975) (recognizing availability of direct shareholder actions).

Thus, when a

shareholder brings suit, “the court is to perform an independent inquiry to determine whether the
action is direct or derivative in nature.” Resh v. Bortner, No. CV 16-02437, 2016 WL 6834104,
at *5 (E.D. Pa. Nov. 21, 2016). Whether the action is direct or derivative “must be determined
from the nature of the wrong alleged and the relief, if any, that could result if the plaintiff were to
prevail.” Id. quoting Hill, 85 A.3d at 550. In order to determine the nature of the wrong alleged,
a court must look to the body of the complaint. Id. If the “gravamen of the complaint is injury
to the corporation, or to the whole body of its stock,” the action is derivative, and the shareholder
cannot sue as an individual. Id. If, on the other hand, “the injury is one to the plaintiff as a
shareholder in his individual capacity, and not to the corporation” the shareholder may file a
direct action. Simms v. Exeter Architectural Prods., Inc., 868 F. Supp. 677, 681-82 (M.D. Pa.
1994) (denying motion to dismiss where plaintiff shareholder alleged “a full blown scheme to
squeeze him out”).

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Here, Defendants first argue that Tri-State has failed to sustain any injury or damages.
(ECF No. 29 at 9). According to Defendants, the sale inquiries at issue in the complaint never
occurred, Tri-State was never actually expelled from WES, Jack was not terminated from his
position as CEO of WES, and the assets of WES were sold at an auction, so neither SPV nor TriState received any distributions. (Id.). At the motion to dismiss stage, however, plaintiffs’ wellpleaded allegations will be taken as true. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). TriState does allege harm in the second amended complaint. See ECF No. 27 at ¶ 28 (alleging that
Defendants engaged in a concerted effort to force Jack out and gain control of WES “to the
direct detriment and harm of Jack and Tri-State”); id. at ¶ 48 (alleging Defendants were freezing
Jack and Tri-State out to “deliberately eliminate Tri-State from realizing any financial benefit
from its ownership in WES”). These allegations are sufficient to find harm at this stage. See
Liss v. Liss, 2002 WL 576510, at *5 (Pa. Com. Pls. Mar. 22, 2002) (finding plaintiff’s the
damages include “being deprived of his rights of ownership and other corporate benefits
primarily through [defendant’s] allegedly oppressive and fraudulent conduct and the alleged
conspiracy . . . to deprive [plaintiff] of his interest in [the company].”).
Second, Defendants argue that any injury alleged “would have been suffered by SPV as a
member as well and [is] not exclusive to Tri-State or Jack” and as such, can only be brought in a
derivative action. (ECF No. 29 at 10). This Court disagrees. As this Court stated in its previous
order, Tri-State “properly asserts a direct claim, because the harms alleged are unique to TriState (rather than being shared by WES or SPV), and any benefits will flow to Tri-State alone (as
opposed to WES or SPV).” (ECF No. 25 at 22). Indeed, an examination of the second amended
complaint reveals that the gravamen of the complaint is injury to Tri-State and Jack, not injury to

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WES or all shareholders. Thus, the fiduciary duty claims are properly pled as direct, rather than
derivative, claims.
Finally, Defendants argue that “since Hill, Pennsylvania does not permit derivative
claims to proceed as a direct cause of action.” (ECF No. 29 at 12). In Hill, the plaintiff and
defendant5 each owned 50% of a corporation established to create and operate a restaurant. 85
A.3d at 543-44. Defendant was tasked with running the day-to-day operations of the business
once it was up and running. Id. at 544. After he assumed control, however, plaintiff alleged that
he began unlawfully using the business as a “cash cow” to benefit himself and his family and
friends. Id. As a result, the restaurant incurred debt, “[fell] in arrears to the taxing authorities”
and was forced to close. Id. The court held that all damages alleged by the plaintiff were
“‘indirect damages’ that resulted from an injury to the corporation” and thus held that the
plaintiff could not bring a direct action. Id. at 551. In so holding, the court did acknowledge that
a shareholder has standing to sue individually if it properly alleges a direct, personal injury that
is independent to any injury to the corporation—it merely held that plaintiff’s alleged injury did
not meet that standard. Id. at 548, 552. Tri-State, on the other hand, does meet that standard, as
discussed above, so Hill does not bar Tri-State’s action against Grose.
The Hill court further held that the Pennsylvania Supreme Court would likely not adopt
Section 7.01(d) of the American Law Institute (“ALI”) Principles of Corporate Governance,
which states that in the case of closely held corporations, courts, in their discretion, can treat
derivative claims as direct claims. Id. at 553. The court only reached that decision, however,
after concluding that the nature of the injury foreclosed the possibility of a direct claim. See id.
(“Appellant also argues that—even if his claims are derivative in nature—he has standing to sue .

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There were actually three defendants in Hill, but only one is relevant for the purposes of the
fiduciary duty analysis. Thus, this Court uses “defendant” to refer to Ronald J. Ofalt, Jr.

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. . directly because [the restaurant] is a closely held corporation.”). Here, the Court need not
reach the “even if” because Tri-State properly brings this action as a direct action, given the
nature of its alleged injury. Thus, this Court’s holding does not turn on whether the Supreme
Court of Pennsylvania adopts Section 7.01(d) of the ALI Principles. To be sure, this Court’s
previous order notes that its holding “comports with Section 7.01(d) of the ALI Principles of
Corporate Governance” but that is unnecessary to the Court’s actual holding that Tri-State
properly pleads an independent injury sufficient to bring a direct action—not merely because it is
a closely held corporation and Section7.01(d) applies, but because the injury does not flow
through the corporation. See ECF No. 25 at 22-23.
B.

The Fiduciary Duty Claim Against SPV Can Proceed.

Defendants implicitly acknowledge that Defendant Grose has a fiduciary duty to TriState. Indeed, their only argument as to Grose is that the fiduciary duty claim cannot proceed
directly. Given this Court’s ruling that the nature of the injury allows the action to proceed
directly, rather than derivatively, the only remaining issue is whether Tri-State, a 50%
shareholder, has properly pled a claim against SPV, the other 50% shareholder.
Defendants again rely primarily on Hill v. Ofalt, 85 A.3d 540 (Pa Super 2014), this time
for the proposition that one 50% shareholder in a closely held corporation or limited liability
company does not have standing to assert a direct action against another 50% shareholder for
breach of fiduciary duties. Defendants argue that the cases relied upon by the Court in its
previous order were all decided before Hill and that Hill changes the outcome of this case. But
the Court was aware of Hill when it issued its prior ruling, and indeed, cited directly to Hill. (See
ECF No. 25 at 10, 19). Defendants’ reliance on Hill is misplaced, as Hill is distinguishable from
the facts at issue here.

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The overall issue decided in Hill was whether the entire case could proceed directly, or
whether it needed to be brought as derivative action, under the law described above. Put simply,
the question before the Hill court dealt not with whether a duty existed between 50%
shareholders, but rather with plaintiff’s ability to bring the case as a direct or a derivative action.
Thus, the ultimate holding was that the plaintiff did not allege any injury independent of the
injury to the corporation, and thus the action could not be brought directly. 85 A.3d at 552. For
the reasons discussed above, the case sub judice is different because the injury is unique to TriState and Jack.
It is true that in its analysis of the fiduciary duty claim, the Hill court held that a
fiduciary duty claim was not cognizable under the facts of the case. 85 A.3d at 549. In so
holding, the court found that plaintiff made “absolutely no argument” as to why defendant owed
him a fiduciary duty. Id. at 500. Instead, plaintiff cited to two non-binding cases “in a
conclusory fashion”: Baron v. Pritzker, 52 PA. D. & C.4th 14 (PA. Com. Pl. 2001) and Korman
Corp. v. Franklin Town Corp., 34 Pa. D. & C.3d 495 (Pa. Com. Pl. 1984). The Hill court
distinguished those cases in part on the basis that the plaintiff in Hill did not allege that
defendant attempted to freeze him out of the business. Id. at 551. Instead, plaintiff willingly
turned over the helm of the restaurant to defendant. Id. (emphasis in original).
Here, unlike the plaintiff in Hill, Tri-State does allege that defendants attempted to freeze
Tri-State out. See ECF. No. 27 at ¶ 48 (“Grose and/or SPV . . . [sought] to sell WES or its assets
to third-parties in a manner to deliberately eliminate Tri-State from realizing any financial
benefit from its ownership in WES”); id. at ¶ 50 (“Grose and/or SPV offered to sell WES . . . and
expressed the manifest written intent to exclude Tri-State and Jack from sharing in the profits”);
id. at ¶ 53 (alleging that Grose and SPV attempted to “expel Tri-State as a Member of WES”).

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Thus, this case is different than Hill, and is more factually similar to Baron and Korman. The
only other two cases Defendants cite to for the proposition that there is no duty between 50%
shareholders are also not persuasive. In Schmechel v. Gaither, the court cited to Hill for the
proposition that it “recently refused to recognize fiduciary duties between equal shareholders.”
2015 WL 6957061, at *4 (Pa. Super June 24, 2015). But Hill is distinguishable for the reasons
discussed above, and the Schmechel court gave no other reason or analysis for not finding a
fiduciary duty.
In Resh v. Bortner, the court’s statement that “Pennsylvania appellate courts have
explicitly rejected the notion that an equal shareholder owes a fiduciary duty to a coequal
shareholder” was in the context of a motion to appoint a receiver, which the court stated is a
“drastic remedy” that should be used “sparingly, with caution . . . and only in an extreme case
under extraordinary circumstances.” 2016 WL 4138638, at *2-3 (E.D. Pa. Aug. 3, 2016). The
only cases cited by the Resh court were Schmechel and Hill. In a later decision, the Resh court
explicitly stated that it “need not determine” whether a fiduciary duty was owed on the facts of
the case, because the case could only be brought as a derivative case given the nature of the
alleged injury. See Resh v. Bortner, 2016 WL 6834104, at *4 (E.D. Pa. Nov. 21, 2016).
Defendants cite to no other cases for the proposition that there cannot be a duty between
50% shareholders. Indeed, Defendants acknowledge that there is no Pennsylvania Supreme
Court decision on the issue. (ECF No. 29 at 11). Given the factual differences in this case and
Hill, and the fact that there is no Pennsylvania Supreme Court decision on point, the Court is
unwilling to depart from its previous holding that the fiduciary duty claim can proceed against
SPV. Indeed, the principles of stare decisis compel the Court to rule consistent with its previous
order. See United States v. Schreiber, 150 F.R.D. 106, 108 (S.D. Ohio 1993) (“Under the

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doctrine of stare decisis, once a court has applied a principle of law to a certain set of facts, it
will apply that principle to all future cases involving facts that are substantially the same.”).
IV.

CONCLUSION

For the reasons stated above, the Court DENIES Defendants’ Motion to Dismiss (ECF No.
28).
IT IS SO ORDERED.

DATED: March 5, 2018

s/Algenon L. Marbley_______________
ALGENON L. MARBLEY
UNITED STATES DISTRICT JUDGE 

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