[Cite as Edelman v. JELBS, 2015-Ohio-5542.]

IN THE COURT OF APPEALS OF OHIO 

TENTH APPELLATE DISTRICT 

Lynn Edelman, Individually : 

and Derivatively on Behalf of 

EDCO Tool and Supply, Inc., : 

 Plaintiff-Appellant/ : No. 14AP-512 

 Cross-Appellee, (C.P.C. No. 12CV-5688) 

v. : 

 (REGULAR CALENDAR) 

JELBS, : 

 Defendant-Appellee, : 

Samuel Richard Edelman et al., : 

 Defendants-Appellees/ : 

 Cross-Appellants. 

 : 

 

D E C I S I O N 

Rendered on December 31, 2015 

 

Zeiger, Tigges & Little LLP, Marion H. Little, Jr. and 

Christopher J. Hogan, for appellant/cross-appellee. 

Porter, Wright, Morris & Arthur LLP, David S. Bloomfield, 

Jr. and Jared M. Klaus, for appellees/cross-appellants. 

 

APPEAL from the Franklin County Court of Common Pleas 

BRUNNER, J. 

{¶ 1} Plaintiff-appellant/cross-appellee, Lynn Edelman, Individually and 

Derivatively on Behalf of EDCO Tool and Supply, Inc., appeals from a judgment of the 

Franklin County Court of Common Pleas that granted compensatory and punitive 

damages, attorney fees, and permanent injunctive relief against defendantsappellees/cross-appellants, Samuel Richard Edelman, Jerry Zail Edelman, Barry David 

Edelman, and EDCO Tool and Supply, Inc. Appellees/cross-appellants have filed a cross-
No. 14AP-512 2 

appeal from the same judgment. For the following reasons, we affirm in part, reverse in 

part, and remand for further proceedings. 

I. FACTS AND PROCEDURAL HISTORY 

{¶ 2} In 1969, Ralph Edelman, along with his two brothers, incorporated EDCO 

Tool and Supply, Inc. ("EDCO"), a wholesaler and retailer of industrial tools, supplies, and 

machinery in the central Ohio and Lima, Ohio areas. The parties to this appeal are 

Ralph's four sons, each of whom began working at EDCO in the 1970s. The parties are 

equal 25 percent shareholders of all of EDCO's common stock. Until his death in 2008, 

Ralph maintained strict control over all aspects of EDCO's operations. 

{¶ 3} Between 1993 and 1997, each of the parties received annual compensation 

of approximately $175,000. In August 1997, appellant resigned his full-time employment 

with EDCO; however, he retained his 25 percent shareholder interest in the company. 

Appellees remain as full-time employees, and they are the sole officers and directors of 

EDCO. As full-time employees, appellees have been involved in virtually all facets of the 

company, performing managerial duties such as strategic planning, sales, purchasing, 

customer service, and bookkeeping, as well as manual duties such as stocking the 

warehouse and sweeping floors. 

{¶ 4} After leaving EDCO, appellant became embroiled in an ongoing dispute 

with appellees regarding access to EDCO's corporate and financial records. The dispute 

resulted in appellant filing a complaint against EDCO seeking to enforce his shareholder 

rights to examine EDCO's corporate and financial records. Appellant's legal action 

ultimately was resolved through an August 1998 settlement agreement between appellant 

and EDCO, the terms of which permitted appellant annual inspection of EDCO's 

corporate and financial records. Indisputably, appellees did not provide appellant with 

access to EDCO's corporate and financial records in accordance with the terms of the 

settlement agreement. 

{¶ 5} At a shareholder's meeting held on June 30, 2005, appellees voted to adopt 

a resolution amending EDCO's articles of incorporation to create a new class of preferred 

stock to be issued to appellees. The amendment provided appellees, as preferred 

shareholders, absolute discretion to determine the amount and timing of preferred share 

dividend distributions. The amendment further provided appellees the authority to 
No. 14AP-512 3 

liquidate EDCO's long-standing investment portfolio in order to fund preferred share 

dividend distributions. Appellant attended the meeting and voted against the 

amendment. 

{¶ 6} After 2005, in addition to receiving individual annual salaries of 

approximately $60,000, appellees began making semi-annual determinations regarding 

whether and in what amount to award themselves preferred share dividends. Appellees 

made these determinations after considering general factors such as overall business 

climate, corporate needs, cost of living indexes, cost of doing business, historical wage and 

preferred share dividend payments, and the work performed by appellees. However, 

appellees did not utilize any specific criteria or methodology in determining whether to 

declare preferred share dividends and/or the amount of preferred share dividends to be 

distributed, nor did they consider EDCO's revenues or whether their compensation 

package was comparable to that of officers and directors of EDCO's competitors. Further, 

appellees made the preferred share dividend distribution decisions during informal 

meetings without memorializing their discussions. Because EDCO's revenues were often 

insufficient to fund the preferred share dividend distributions, appellees liquidated 

various long-term investments held by EDCO. Indisputably, appellees never notified 

appellant of the amount or frequency of preferred share dividend distributions. 

{¶ 7} On May 3, 2012, appellant filed a verified complaint "individually and 

derivatively on behalf of EDCO" against EDCO and appellees. Appellant asserted claims 

against appellees for violation of various provisions in R.C. Chapter 1701, breach of 

fiduciary duty to both appellant and EDCO, and breach of the 1998 settlement 

agreement.1 Appellant filed an amended verified complaint on November 21, 2012 

asserting essentially the same claims set forth in his original complaint. Appellees 

answered and asserted a counterclaim against appellant for breach of fiduciary duty based 

on his alleged competition with EDCO. 

{¶ 8} In a journal entry filed October 28, 2013, the trial court resolved the parties' 

dispute regarding the applicable statute of limitations on appellant's breach of fiduciary 

duty claim. In that entry, the court determined the applicable statute of limitations to be 

 

1 Appellant, a 25 percent minority shareholder in the JELBS partnership, also sought relief against appellees 

for misconduct in their capacities as controlling partners. The trial court's findings, conclusions, and orders 

with respect to JELBS are not at issue in this appeal. 
No. 14AP-512 4 

four years. Having so found, the court concluded that appellees were insulated against 

any claim based specifically on the creation of the preferred class of stock in 2005, as such 

occurred beyond the four-year period preceding the filing of appellant's original 

complaint on May 3, 2012. The court further concluded, however, that the statute of 

limitations did not bar appellant's claims based on appellees' alleged ongoing misconduct 

in declaring preferred dividends in the four-year period preceding the filing of appellant's 

complaint. The court reasoned that "[e]very time a new preferred stock dividend is 

declared * * * within the four-year period before suit, [appellees] have had a new 

opportunity to observe their fiduciary duty." (Oct. 28, 2013 Journal Entry.)2

{¶ 9} Thereafter, in early November 2013, the trial court held a three-day bench 

trial on appellant's claims and appellees' counterclaim. The above facts are derived from 

the parties' testimony and related documentation, as well as several stipulations entered 

by the parties. In addition, both parties presented expert testimony. 

{¶ 10} Rebekah Smith, a certified public accountant, testified as appellant's expert 

witness. Smith reviewed the information contained in EDCO's QuickBooks files, as 

formatted according to the QuickBooks accounting software program designed for small 

businesses. QuickBooks acts as a comprehensive general ledger system to track and 

generate reports for a variety of types of financial records, including sales, accounts 

receivable, accounts payable, inventory, and taxes. QuickBooks is an electronic file 

system only; it does not contain source documentation such as invoices, bank statements, 

and securities brokerage statements. According to Smith, the financial information 

contained in EDCO's QuickBooks files was neither sufficiently detailed, nor supported by 

adequate underlying documentation. Accordingly, Smith opined that appellees' 

maintenance of EDCO's financial records was inadequate. 

{¶ 11} Smith further testified that she reviewed EDCO's tax returns for the relevant 

time period to determine the percentage of EDCO's taxable income paid in compensation 

to appellees (including both wages and preferred share dividends). According to Smith, 

this review revealed a significant decline in revenues and a significant increase in 

compensation as a percentage of revenues. Further, in multiple years, the total 

compensation paid appellees exceeded 100 percent of EDCO's net profits. 

 

2 Accordingly, all references in this decision to "the relevant time period" means the four-year time period 

from May 3, 2008 to May 3, 2012. 
No. 14AP-512 5 

{¶ 12} Smith also stated that a review of EDCO's balance sheets for the relevant 

time period revealed a significant decrease in EDCO's investment portfolio. According to 

Smith, "substantially all" sales of EDCO's stocks were used to fund appellees preferred 

share dividend compensation. (Tr. Vol. II, 23.) Smith noted that compensation paid to 

an individual in the form of dividends is taxable at a much lower rate than compensation 

paid to an individual in the form of wages. Thus, appellees benefited personally from 

being compensated through the payment of dividends; however, such method of payment 

provided only a de minimis tax benefit to EDCO. 

{¶ 13} Utilizing EDCO's QuickBooks files, Smith prepared a summary of the total 

compensation received by appellees for fiscal years 20073 through 2011, including wages 

and preferred share dividends. The summary demonstrated that appellees collectively 

were paid wages of $181,089, $181,017, $180,924, and $180,929 in fiscal years 2008 

through 2011, respectively. As to preferred share dividends, appellees collectively were 

paid $285,000, $90,000, $570,000, $600,000, and $285,000 in fiscal years 2007 

through 2011, respectively. Thus, during this time period, appellees' wages totaled 

$723,959 and preferred share dividends totaled $1,830,000. Smith opined that appellees 

"have overpaid themselves since May 3rd 2008" and that the current method of 

"dip[ping] into * * * the stock of the company [is] not a sustainable model. At some point, 

they will run out of assets and they won't have a viable company." (Tr. Vol. II, 35.) 

{¶ 14} On cross-examination, Smith acknowledged that, prior to the 2005 

amendment to EDCO's articles of incorporation, compensation paid to appellees was in 

the form of wages only; after the 2005 amendment, appellees were paid in wages and 

preferred share dividends. Smith identified plaintiff's exhibit No. 94 as a summary of 

wage compensation paid to EDCO's officers from 1994 through 2002. The officers 

(including appellant) were each paid wages of approximately $200,000 in 1994, 

$148,000 in 1995, $130,000 in 1996, and $185,000 in 1997. Following appellant's 1997 

exit from EDCO and continuing to the time of the 2005 amendment, appellees were each 

paid wages of approximately $296,000 in 1999, $401,000 in 2000, $458,000 in 2001, 

$458,000 in 2002, $189,000 in 2003, and $95,000 in 2005. After 2005, appellees were 

 

3 Fiscal year 2007 incorporated only May 3, 2008 through June 30, 2008. All other fiscal years incorporated 

July 1 through the following June 30. Fiscal year 2012 was not included in the calculation because Smith had 

not yet received the pertinent information from appellees. 
No. 14AP-512 6 

each paid approximately $60,000 in wages. Smith admitted on cross-examination that, 

in conducting her compensation analysis, she did not take into account the number of 

hours appellees worked at EDCO, nor did she consult any industry sources to determine a 

benchmark for appellees' compensation based on revenues. 

{¶ 15} Barry Adelman, a certified public accountant, testified as appellees' expert 

witness. Adelman has provided tax preparation services for EDCO for over 20 years. In so 

doing, Adelman obtains an electronic copy of EDCO's QuickBooks files, along with 

underlying supporting documentation. Adelman opined that EDCO's record-keeping and 

use of QuickBooks "is a proper methodology of providing their own personal use for 

internal use and for me to prepare tax returns." (Tr. Vol. III, 151.) On cross-examination, 

Adelman clarified that his opinion as to the reasonableness of EDCO's record-keeping was 

limited to purposes of tax preparation and was not offered as an opinion as to the 

reasonableness of record-keeping as related to appellant as a minority shareholder. 

{¶ 16} Regarding appellees' compensation package, Adelman stated that, prior to 

2005, appellees' compensation was paid in the form of wages only. In 2005, appellees 

asked Adelman to opine as to the tax advantages of allocating a portion of their 

compensation package to preferred dividends. Adelman advised appellees that such 

allocation would benefit appellees individually and would have no negative tax 

consequences to EDCO. Based on this advice, appellees adjusted their compensation 

package to include preferred share dividends in addition to wages. Adelman 

acknowledged that, although EDCO's QuickBooks files included detailed information 

regarding the amount of appellees' compensation package paid in the form of wages 

versus preferred share dividends, no underlying supporting documentation revealed the 

rationale for setting those amounts. 

{¶ 17} Adelman further testified that, from 1993 through 2011, EDCO's officer 

compensation package has exceeded its taxable income "[m]ore times than not." (Tr. Vol. 

III, 153.) After 2005, appellees utilized retained earnings or other company assets, 

including EDCO's investment portfolio, as a means of financing their compensation 

package. Adelman opined that appellees' method of financing their compensation 

package has not affected the long-term viability of the corporation, because EDCO has 
No. 14AP-512 7 

consistently paid its bills, and the fair market value of the investments has remained 

"about the same." (Tr. Vol. III, 167.) 

{¶ 18} On cross-examination, Adelman stated that, as a general rule, 

shareholders/owners of closely held corporations often finance their compensation 

packages through the use of retained earnings/investment portfolio "because they are the 

ones that are working in the business." (Tr. Vol. III, 168.) However, as to EDCO 

specifically, Adelman acknowledged that he was neither asked by appellees, nor did he 

independently consider, whether appellees' method of funding their compensation in this 

manner had any detrimental effect on appellant as a minority shareholder. However, in 

response to a question regarding whether, since 2008, the wages and preferred share 

dividends appellees paid themselves was reasonable with respect to appellant, Adelman 

averred, "[appellees'] salary and overall compensation package historically was reasonable 

* * * and did not have any bearing on its effect on * * * a passive shareholder." (Tr. Vol. III, 

171.) He later stated, however, that he had no opinion "as to whether the amount paid in 

compensation either as dividends or wages to [appellees] is fair to [appellant]." (Tr. Vol. 

III, 180.) 

{¶ 19} Following the conclusion of trial, the trial court issued preliminary findings 

of fact and conclusions of law on the record. As pertinent here, the court determined that 

appellees breached their heightened fiduciary duty to appellant as a minority shareholder 

in "taking excessive preferred dividends for themselves" out of EDCO's "long-term cash 

reserves accumulated mostly while [appellant] was still employed" that "really belonged 

to all the shareholders." (Tr. Vol. III, 319, 321.) The trial court noted that the justification 

set forth for the creation of the preferred class of stock was to "materially enhance 

[appellees'] tax returns" with "very little or no real significant purpose for EDCO." (Tr. 

Vol. III, 320.) The court further noted that, during this period, "EDCO was not profitable 

and could not have funded this scheme without dipping into the old retained earnings" 

and that appellees neither documented their decision making process nor disclosed the 

amount or frequency of the distributions to appellant. (Tr. Vol. III, 320.) 

{¶ 20} Further noting that appellees' annual compensation package was 

approximately $200,000, the court stated that "the thought of paying $200,000 a year to 

three employees whose duties include opening boxes and sweeping floors and answering 
No. 14AP-512 8 

phones or doing other work of a nominal almost minimum-wage content is just 

ridiculous." (Tr. Vol. III, 322.) The court continued: 

No outside businessman coming into EDCO and seeking to 

make the best of this long-term business would have tolerated 

that. They would have laid off a couple of the $200,000 

employees and hired some minimum wage guys. They 

wouldn't have kept people around with college degrees when 

the business couldn't support them just because they were in 

the family. 

And if that had happened, more money would have flowed to 

the bottom line and then would have been available as 

dividends to all four common shareholders. 

(Tr. Vol. III, 322.) The court further observed: 

[T]he damages that are due here ought to be done by recasting the combination of salary and preferred stock between 

2008 and 2013 that's been paid to the three insiders. 

The three insiders, clearly, are due something for salary. I 

probably can say * * * as a matter of course that it's at least 60 

thousand bucks a year, but there's a large range between 60 

and 200 for these people, and at some point I'm leaning 

toward about a hundred thousand. 

(Tr. Vol. III, 324.) 

{¶ 21} The trial court provided the parties the opportunity to submit proposed 

findings of fact and conclusions of law. Following those submissions, the court, on 

January 23, 2014, issued extensive written findings of fact and conclusions of law 

("Jan. 23, 2014 Findings"). Therein, the trial court determined that appellees violated 

various provisions of R.C. Chapter 1701 pertaining to corporate record-keeping and 

disclosure. The court determined that the appropriate relief for said violations was the 

issuance of permanent injunctive relief enforcing appellant's statutory rights. 

{¶ 22} The court further determined that appellees breached their fiduciary duty to 

appellant and that he was entitled to both compensatory and punitive damages resulting 

from said breach. More specifically, the court found that the total compensation packages 

for each of the appellees was "grossly disproportionate to the value each man brought to 

his work," and that appellees' failure to disclose their overall compensation arrangement 
No. 14AP-512 9 

to appellant "leaves the clear inference that each of them recognized that they were 

participating in an excessive compensation package intended to loot long-term corporate 

financial reserves at [appellant's] expense." (Jan. 23, 2014 Findings, ¶ 53-54.) The court 

further determined, however, that appellees' misconduct was not so extreme as to trigger 

the "faithless servant" doctrine. More specifically, the court stated: 

While [appellees] improperly misappropriated long-term 

financial reserves from EDCO over and above amounts 

reasonably due them as salary and benefits, and did not do 

well in operating EDCO, this is not such an extreme situation 

as to trigger the "faithless servant" doctrine. Therefore, the 

wrongdoing proven here by these insiders does not demand 

that they forfeit all or substantially all their reasonable

compensation, because there was not manifest disloyalty to 

the business itself. * * * [A]t its heart what occurred here 

reflects not so much the [appellees'] manifest disloyalty to the 

business itself but rather a stubborn, malicious and misguided 

scheme to deprive the sole minority shareholder of his rights 

(financial and otherwise). 

(Emphasis sic.) (Jan. 23, 2014 Findings, ¶ 81.) The court awarded appellant 

compensatory damages "measured by his 25% share of all the excess, purported 

'compensation' taken by each [appellee] above $100,000 per year since 2008" based on 

appellees' breach of fiduciary duty in "misappropriat[ing] EDCO reserves to overpay 

themselves." (Jan. 23, 2014 Findings, ¶ 86.) 

{¶ 23} The court also determined that appellees breached and/or tortiously 

interfered with the 1998 settlement agreement. The court further stated that it 

"disregarded" appellant's derivative claim relative to EDCO because such claim provided 

"no greater or different relief than his individual claim." (Jan. 23, 2014 Findings, ¶ 12.) 

Lastly, the court rejected appellees' counterclaim. The court set an evidentiary hearing for 

April 4, 2014 to receive evidence regarding appellant's attorney fees and to set the amount 

of compensatory and punitive damages. 

{¶ 24} On April 3, 2014, the parties filed written stipulations with regard to the 

April 4, 2014 hearing. As pertinent here, the stipulations included appellant's request for 

an award of compensatory damages "in the amount of 25-percent of the combined wage 

and preferred share dividend compensation in excess of $100,000 per year per [appellee] 

received from EDCO during each fiscal year since May 3, 2008." (Apr. 3, 2014 
No. 14AP-512 10 

Stipulations, ¶ 4.) Appellant qualified his request with language preserving his "objection 

to the Court's decision not to apply the faithless servant doctrine to require [appellees] to 

disgorge all compensation received from EDCO during the period of disloyalty." (Apr. 3, 

2014 Stipulations, ¶ 4.) The stipulations also included appellees' opposition to any 

damage award. In addition to the foregoing, the parties stipulated the combined wages 

and preferred dividends received by each of the appellees for fiscal years 2007 through 

2012.4 The stipulations specifically stated that each of the appellees received $115,000, 

$90,363.00, $250,339.00, $260,308.00, $155,309.66, and $240,000.00 for fiscal years 

2007 through 2012, respectively. 

{¶ 25} Following the April 4, 2014 hearing, the trial court issued a final judgment 

on May 29, 2014. In its judgment, which expressly incorporated its January 23, 2014 

findings of fact and conclusions of law, the trial court awarded appellant damages jointly 

and severally against appellees of: (1) $3,065 based on his breach of contract claim; 

(2) $468,000 based on his breach of fiduciary duty claim; (3) $218,704 in attorney fees 

and expenses; and (4) $120,000 in punitive damages. The trial court also issued 

permanent injunctive relief which, as pertinent here, permits appellant semi-annual 

access to EDCO's paper and computerized corporate records. 

II. ASSIGNMENTS OF ERROR 

{¶ 26} Appellant advances three assignments of error for our review: 

1. The Trial Court erred, as a matter of law, in failing to 

properly apply the faithless servant doctrine to its factual 

findings recognizing the malicious, repeated, and longstanding disloyalty of Defendants Jerry, Samuel, and Barry 

Edelman (the "Edelman Defendants") in breach of their 

fiduciary duties owed directly to Plaintiff Lynn Edelman 

("Lynn Edelman"). 

2. Alternatively, the [T]rial Court erred in disregarding Lynn 

Edelman's derivative claim, given the Edelman Defendants' 

clear breach of their fiduciary duties of loyalty to EDCO. 

3. The Trial Court erred, as a matter of law, in awarding Lynn 

Edelman injunctive relief—based on, inter alia, Defendants' 

adjudged violations of R.C. 1701.37—that imposes temporal 

 

4 Fiscal year 2007 encompassed only May 3, 2008 through June 30, 2008. All other fiscal years 

encompassed July 1 through the following June 30. 
No. 14AP-512 11 

limitations on his inspection rights that are inconsistent with 

the statute. 

{¶ 27} Appellees assert two cross-assignments of error: 

[1.] The Trial Court Erred in Placing the Burden of Proof on 

Jerry, Barry, and Sam to Prove the Reasonableness of Their 

Compensation. 

[2.] The Trial Court's Finding That Jerry, Barry, and Sam 

Received Excessive Compensation From EDCO Is Against the 

Manifest Weight of the Evidence. 

III. DISCUSSION 

A. Appellees' First Cross-Assignment of Error – Whether the Burden 

was on Appellees to Prove the Reasonableness of their 

Compensation 

{¶ 28} We note initially that "[a] determination of the burden of proof is a question 

of law." Brothers v. Morrone-O'Keefe Dev. Co., LLC, 10th Dist. No. 05AP-161, 2006-

Ohio-1160, ¶ 17, citing Acuity, Inc. v. Trimat Constr., 4th Dist. No. 05CA2, 2005-Ohio6128, ¶ 17. An appellate court reviews questions of law de novo. Id. at ¶ 17, citing 

Cleveland Elec. Illuminating Co. v. Pub. Utilities Comm., 76 Ohio St.3d 521, 523 (1996). 

{¶ 29} As the facts indicate, EDCO is a close corporation, which is defined as "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 (1989), paragraph one of the 

syllabus. "Ownership of close corporations is 'limited to a small number of people who 

are dependent on each other for the enterprise to succeed.' " Wheeler v. Johnson, 2d Dist. 

No. 22178, 2008-Ohio-2599, ¶ 24, quoting Tinter v. Lucik, 172 Ohio App.3d 692, 2007-

Ohio-4437, ¶ 23 (8th Dist.). Minority shareholders of close corporations are peculiarly 

susceptible to misuse or abuse by the majority shareholders. Franks v. Rankin, 10th Dist. 

No. 11AP-962, 2012-Ohio-1920, ¶ 31, citing Kademian v. Marger, 2d Dist. No. 24256, 

2012-Ohio-962, ¶ 58. One common abuse of power involves the payment of excessive 

compensation to majority shareholders or corporate officers. Bell v. Bell, 6th Cir. No. 96-

3655 (Dec. 3, 1997). "Given the extensive opportunities for abuse under a close 

corporation structure, ensuring that majority shareholders of close corporations advance 

the corporation's, and not their personal, interests is critical." Id. Accordingly, majority 
No. 14AP-512 12 

shareholders of close corporations owe minority shareholders a heightened fiduciary duty 

of good-faith and loyalty. Franks at ¶ 31, citing Crosby at 108. 

{¶ 30} "In a close corporation, a majority shareholder breaches a fiduciary duty 

when that shareholder manipulates his or her control over the close corporation in order 

to unfairly acquire personal benefits owing to or not otherwise available to minority 

shareholders of the close corporation." Yackel v. Kay, 95 Ohio App.3d 472, 478 (8th 

Dist.1994), citing Crosby. In the present case, the trial court found that appellees, as 

majority shareholders, breached their heightened fiduciary duty to appellant, the minority 

shareholder, by paying themselves excessive compensation. In so finding, the trial court 

placed the burden of proving the reasonableness of their compensation on appellees. 

{¶ 31} When a minority shareholder of a close corporation brings suit against a 

controlling shareholder for breach of his or her fiduciary duties, a presumption arises that 

the fiduciary, by virtue of his or her superior position, bears the burden of proof with 

respect to the fairness of his or her actions. Id. at 480. Consistent with this presumption, 

the fiduciary must demonstrate that his or her actions were fair, reasonable, and based on 

a full disclosure of relevant information. Bell; Biggins v. Garvey, 90 Ohio App.3d 584, 

597 (11th Dist.1993) (noting that a director employee has the burden "to justify his salary 

and to show the reasonableness thereof"); Soulas v. Troy Donut Univ., Inc., 9 Ohio 

App.3d 339, 341 (10th Dist.1983), citing Fendelman v. Fenco Handbag Mfg. Co., 482 

S.W.2d 461 (Mo.1972) (finding rule that directors bear the burden of establishing the 

reasonableness of their compensation applied with "particular force * * * since their 

salaries were increased at a meeting to which * * * the minority director[] was not 

invited"). 

{¶ 32} Citing Mlinarcik v. E.E. Wehrung Parking, Inc., 86 Ohio App.3d 134 (8th 

Dist.1993), appellees contend that the trial court improperly burdened them with proving 

the reasonableness of their compensation. In Mlinarcik, the court asserted that each case 

must be considered separately on the merits when determining which party bears the 

burden of proving the reasonableness or unreasonableness of compensation paid to 

majority shareholders. Id. at 139. In Mlinarcik, the compensation paid the majority 

shareholders was consistent since 1982. The minority shareholder had received dividends 

and annual reports since that time and had actual notice, or by due diligence should have 
No. 14AP-512 13 

been on notice as to the majority shareholders' compensation, but did not challenge it 

until 1989. Id. at 140. The Mlinarcik court appears to have concluded that the plaintiff 

minority shareholder implicitly ratified the compensation and that, therefore, the burden 

of proof should remain with the plaintiff. Indeed, the court stated that "[w]e see no reason 

to apply an exception and upset the general rule that the burden of proof rests on the 

party challenging the cause. So it is up to [plaintiff] to prove that [defendants'] 

compensation was excessive and unreasonable." Id. 

{¶ 33} Contrary to appellees' assertions, Mlinarcik is distinguishable. Here, 

appellees voted to amend EDCO's articles of incorporation to create a preferred class of 

stock for themselves over appellant's objection. Further, appellees set the amount and 

frequency of prepared share dividend distributions without documentation of the 

decision-making process or disclosure to appellant. Appellant was provided no access to 

corporate and financial records or other information regarding the compensation 

appellees paid themselves. Thus, appellant could not have implicitly ratified the 

compensation. Moreover, Mlinarcik, in suggesting that a court must evaluate the facts 

underlying each unreasonable compensation claim before determining with whom the 

burden of proof lies, contradicts the weight of Ohio authority on this issue, which squarely 

places the burden of proof on this issue on the fiduciary. See Yackel; Biggins; Soulas. As 

Mlinarcik does not reflect the current law of Ohio, or, more particularly, of this court, we 

find that appellees' reliance on Mlinarcik is misplaced. We therefore conclude that the 

trial court did not err in placing the burden of proof on appellees to show the 

reasonableness of their compensation. 

{¶ 34} Appellees' first cross-assignment of error is overruled. 

B. Appellees' Second Cross-Assignment of Error – Whether the Trial 

Court's Ruling that Appellees Received Excessive Compensation 

from EDCO was Against the Manifest Weight of the Evidence 

{¶ 35} "In civil cases, as in criminal cases, the sufficiency of the evidence is 

quantitatively and qualitatively different from the weight of the evidence." Eastley v. 

Volkman, 132 Ohio St.3d 328, 2012-Ohio-2179, paragraph two of the syllabus. "[T]he 

standard [illustrating the differences between sufficiency and manifest weight] set forth in 

Thompkins also applies in civil cases." Id. at ¶ 17, citing State v. Thompkins, 78 Ohio 

St.3d 380 (1997). 
No. 14AP-512 14 

{¶ 36} Sufficiency of the evidence is: 

" 'a term of art meaning that legal standard which is applied to 

determine whether the case may go to the jury or whether the 

evidence is legally sufficient to support the jury verdict as a 

matter of law.' * * * In essence, sufficiency is a test of 

adequacy. Whether the evidence is legally sufficient to sustain 

a verdict is a question of law." 

Eastley at ¶ 11, quoting Thompkins at 386, quoting Black's Law Dictionary 1433 (6th 

Ed.1990). By contrast, weight of the evidence: 

"* * * concerns 'the inclination of the greater amount of 

credible evidence, offered in a trial, to support one side of the 

issue rather than the other. It indicates clearly to the jury that 

the party having the burden of proof will be entitled to their 

verdict, if, on weighing the evidence in their minds, they shall 

find the greater amount of credible evidence sustains the 

issue which is to be established before them. Weight is not a 

question of mathematics, but depends on its effect in inducing 

belief.' " 

(Emphasis sic.) Id. at ¶ 12, quoting Thompkins at 387, quoting Black's at 1594. 

{¶ 37} Appellees argue that the trial court erred in finding their annual 

compensation of $200,000 to be excessive. Appellees contend the trial court's finding in 

this regard was made without proper analysis of the factors set forth by this court in 

Soulas. In Soulas, we stated that "[t]he compensation paid to corporate officers and 

directors must bear a reasonable relationship to the value of services rendered." Id. at 

paragraph one of the syllabus. We further stated that "[i]n determining the 

reasonableness of the compensation, all relevant factors should be considered, which 

would primarily include: (1) whether there has been an increase in the business of the 

corporation, (2) the amount of compensation paid to employees for comparable work by 

similar corporations in the same industries, and (3) whether there has been a 

proportionate increase in the duties and responsibilities of the officer employees in 

connection with the substantial increase in their compensation." Id. at 341. 

{¶ 38} We disagree with appellees' assertion that the trial court did not engage in a 

proper analysis of the reasonableness of appellees' $200,000 annual compensation 

package. As noted in Soulas, a trial court should consider "all relevant factors" in 

determining the reasonableness of executive compensation. Id. In the present case, the 

trial court noted that the bulk of appellees' compensation was paid in the form of 
No. 14AP-512 15 

preferred share dividends, which were denied appellant. The court also noted that 

appellees did not utilize any specific criteria or methodology in determining the amount of 

preferred share dividends to be distributed, did not document their decision-making 

process, and did not disclose to appellant the amount or frequency of the distributions. In 

addition, the court noted that the preferred share dividend distributions were made 

during a time EDCO was not profitable and that these dividend distributions had to be 

paid from long-term cash reserves which had largely accumulated while appellant was 

still employed at EDCO. The court additionally noted that the justification for creating 

the preferred class of stock was to personally benefit appellees by decreasing their 

individual income tax burdens. Moreover, the trial court had before it Smith's expert 

opinion testimony that appellees "have overpaid themselves since May 3rd 2008." (Tr. 

Vol. II, 35.) The trial court expressly found Smith to be "a very well-qualified, objective, 

and credible witness." (Jan. 23, 2014 Findings, ¶ 36.) 

{¶ 39} Although the trial court did not consider whether appellees' compensation 

was comparable to that received by similarly situated officers and directors in the 

industry, appellees' argument in this regard is unavailing. As noted above, appellees bore 

the burden of proving the reasonableness of their compensation. That the trial court had 

no comparable compensation evidence before it was subject to appellees' burden to offer 

it, which they did not. There is no basis to now attack the trial court's decision for this 

lack of evidence. 

{¶ 40} The decision of the trial court was not against the manifest weight of the 

evidence, and appellees' second cross-assignment of error is overruled. 

C. Appellant's First Assignment of Error – Whether the Trial Court 

Should Have Applied the Faithless Servant Doctrine in Respect to 

the Relationship Between Appellees and Appellant 

[D]ishonesty and disloyalty on the part of an employee which 

permeates his service to his employer will deprive him of his 

entire agreed compensation, due to the failure of such an 

employee to give the stipulated consideration for the agreed 

compensation. Further, as public policy mandates, an 

employee cannot be compensated for his own deceit or 

wrongdoing. However, an employee's compensation will be 

denied only during his period of faithlessness. 

(Emphasis sic.) Roberto v. Brown Cty. Gen. Hosp., 59 Ohio App.3d 84, 86 (12th 

Dist.1989) (adopting the "faithless servant" doctrine and paraphrasing the Supreme Court 
No. 14AP-512 16 

of Kansas in Bessman v. Bessman, 214 Kan. 510 (1974). Applying the faithless servant 

doctrine, the Roberto court held that an employer was entitled to withhold three years of 

deferred compensation from a hospital administrator who had embezzled from the 

hospital. 

{¶ 41} This court has similarly interpreted the faithless servant doctrine in the 

employer/employee context. In Goal Sys. Internatl., Inc. v. Klouda, 10th Dist. No. 84AP168 (Oct. 10, 1985), this court affirmed an award for an employer for a portion of a 

disloyal employee's salary when, following his termination from employment, the former 

employee, a program developer, tried to market his computer program through a 

competitor. 

{¶ 42} Appellant asserts that the trial court erred as a matter of law in failing to 

properly apply the faithless servant doctrine to its factual findings, "recognizing the 

malicious, repeated, and long-standing disloyalty of Defendants Jerry, Samuel, and Barry 

Edelman * * * in breach of their fiduciary duties owed directly to Plaintiff Lynn Edelman." 

(Appellant's Brief, 1.) We agree with the trial court that there is a duty of majority 

shareholders to minority shareholders of a closely held corporation. Yackel at 478, citing 

Crosby. In fact, we recognize a "heightened fiduciary duty of good faith and loyalty" of 

majority shareholders of close corporations owed to minority shareholders. Franks at 

¶ 31. However, that is not the same thing as concluding that employees of a corporation 

are servants of the shareholders who can be faithless to the shareholders in the relevant 

sense. 

{¶ 43} A recent case considering the faithless servant doctrine in the context of 

close corporations is instructive. Buckingham, Doolittle & Burroughs, L.L.P. v. Bonasera, 

157 Ohio Misc.2d 1, 2010-Ohio-1677. The Buckingham court conducted a general 

overview of application of the faithless servant doctrine and showed that the doctrine is 

more commonly applied in pure employment situations. Id. at ¶ 54. Nevertheless, the 

Buckingham court held that it "may be possible" that shareholder attorneys who departed 

a firm en masse were faithless servants in respect to the firm. Id. at ¶ 57. 

{¶ 44} We hold that the faithless servant doctrine should not be applied in this 

context. Appellees, though they owed fiduciary duties to appellant (since appellant was a 
No. 14AP-512 17 

shareholder in the company), were servants of the company, EDCO, not appellant, and 

therefore could not have been faithless to appellant in the relevant sense. 

{¶ 45} Appellant's first assignment of error is overruled. 

D. Appellant's Second Assignment of Error – Whether the Trial Court 

Erred in Disregarding Appellant's Derivative Action Claims 

{¶ 46} As an alternative to his first assignment of error, appellant asserts that the 

trial court erred in disregarding his derivative claim, "given the Edelman Defendants' 

clear breach of their fiduciary duties of loyalty to EDCO." (Appellant's Brief, 1.) 

The derivative form of action permits an individual 

shareholder to bring "suit to enforce a corporate cause of 

action against officers, directors, and third parties." Ross v. 

Bernhard, 396 U.S. 531, 534, 24 L. Ed. 2d 729, 90 S. Ct. 733 

(1970). Devised as a suit in equity, the purpose of the 

derivative action was to place in the hands of the individual 

shareholder a means to protect the interests of the 

corporation from the misfeasance and malfeasance of 

"faithless directors and managers." Cohen v. Beneficial Loan 

Corp., 337 U.S. 541, 548, 93 L. Ed. 1528, 69 S. Ct. 1221 (1949). 

Kamen v. Kemper Fin. Servs., 500 U.S. 90, 95 (1991). When a shareholder derivative 

action is brought (as an equitable action) by a shareholder on behalf of the corporation, it 

is because the corporation has failed to enforce a right which may properly be asserted by 

it. Civ.R. 23.1, Biggins at 588. Such is appropriately brought by a minority shareholder, 

especially if majority shareholders are breaching their fiduciary duties to the corporation. 

The actions of the minority shareholder and the derivative action of such a shareholder on 

behalf of a corporation are not necessarily identical in interest or process. 

{¶ 47} Moreover, in Columbus Homes Ltd. v. S.A.R. Constr. Co., 10th Dist. No. 

06AP-759, 2007-Ohio-1702, this court applied the faithless servant doctrine in a similar 

context. There, the plaintiff was a passive investor in a number of the defendant's 

business enterprises, including S.A.R. Construction. Id. at ¶ 4. After the parties had a 

falling out, the defendant formed a new company to which he transferred all of the 

business, operations, and capital of S.A.R. and refused to allow the plaintiff an 

opportunity to participate in the new company. Id. at ¶ 6. The plaintiff thereafter 

asserted several claims against the defendant, including a derivative claim on behalf of 

S.A.R. for disgorgement of the defendant's compensation under the faithless servant 

doctrine. Id. at ¶ 7, 51. The trial court agreed that the defendant had been a faithless 
No. 14AP-512 18 

servant to S.A.R. and ordered the full disgorgement of his compensation from S.A.R. and 

from the shell entity the defendant set up to pilfer S.A.R.'s assets and business. Id. at ¶ 51. 

On appeal, this court noted that "[t]he faithless servant doctrine states that an agent is 

entitled to no compensation for conduct which is disobedient or a breach of his duty of 

loyalty." Id. at ¶ 52 citing Fin. Dimensions, Inc. v. Zifer, 1st Dist. No. C-980960 (Dec. 10, 

1999). We affirmed the trial court's application of the faithless servant doctrine, finding 

that "[t]he very act of forming and operating [the new entity] was a misappropriation of 

corporate assets, misappropriation of a corporate opportunity, and a breach of [the 

defendant's] duty to appellees." Id. at ¶ 53. 

{¶ 48} Despite the fact that EDCO is closely held, the facts show that the company 

was not started by these four shareholders. It has been an ongoing entity since it was 

started by the parties' father, Ralph, prior to the 1970s, when the parties began to work in 

the family business. When the trial court elected not to apply the "faithless servant 

doctrine," to award damages to appellant personally, it should have recognized appellant's 

derivative action on behalf of EDCO, especially in its efforts to restore excessive payments 

that had been made from corporate profits and investments to the preferred shareholders. 

In other words, while it was perfectly appropriate to award compensation to appellant, the 

trial court should have recognized that the corporation, itself, had been harmed by these 

shareholders' actions and should also have been placed in a better position. This is 

especially true in light of the accountant's testimony (Adelman) that EDCO's officer 

compensation package has exceeded its taxable income "[m]ore times than not." (Tr. Vol. 

III, 153.) The trial court's denial of equitable relief to the corporation through appellant's 

derivative shareholder action left the corporation in a weakened condition. 

{¶ 49} We sustain appellant's second assignment of error and remand the case for 

consideration of appellant's derivative action and the faithless servant doctrine in that 

context. 

E. Appellant's Third Assignment of Error – Whether Prospective 

Temporal Limitations Imposed by the Court on Appellant's Right to 

Inspect EDCO's Records are Consistent with R.C. 1701.37 

{¶ 50} In his third assignment of error, appellant argues that the trial court erred 

as a matter of law in issuing injunctive relief that limits appellant's right of access to 

EDCO's corporate and financial records to twice per calendar year. Appellant contends 
No. 14AP-512 19 

the temporal limits imposed by the trial court are inconsistent with his rights under R.C. 

1701.37(C). 

{¶ 51} R.C. 1701.37(C) provides, in pertinent part, that: 

Any shareholder of the corporation, upon written demand 

stating the specific purpose thereof, shall have the right to 

examine in person or by agent or attorney at any reasonable 

time and for any reasonable and proper purpose, the articles 

of the corporation, its regulations, its books and records of 

account, minutes, and records of shareholders aforesaid, and 

voting trust agreements, if any, on file with the corporation, 

and to make copies or extracts thereof. 

(Emphasis added.) 

{¶ 52} The trial court's May 29, 2014 judgment entry includes the following 

language in relevant part: 

II. DECLARATORY AND INJUNCTIVE RELIEF. 

The Court also hereby enters the following permanent 

injunctive relief * * *: 

* * * 

5. Integrity and Retention of Financial Records. 

* * * 

(C) Periodic Access to Paper Copies of Financial 

Records 

No later than ten (-10-) business days after receipt of a written 

request from Plaintiff, but no more frequently than twice per 

calendar year, all such persons or entities subject to this order 

are further permanently enjoined to provide Plaintiff with 

access to paper copies of all Financial Records of EDCO * * *. 

(D) Access to "Live" QuickBooks computerized 

records of EDCO. 

In addition to the access to paper copies otherwise ordered 

under ¶¶ 5(C) * * * of this order, upon written request 

Defendants shall provide Plaintiff's outside accountant or 

attorneys with a complete and up-to-date electronic copy of 

EDCO's QuickBooks system. * * * QuickBooks electronic – 
No. 14AP-512 20 

access requests by Plaintiff shall not be made more than two 

times per calendar year. 

{¶ 53} R.C. 1701.37(C) confirms, but does not limit, the common law right of a 

shareholder to examine corporate records at any reasonable time. Danziger v. Luse, 103 

Ohio St.3d 337, 2004-Ohio-5227, ¶ 10-11. R.C. 1701.37(C) therefore does not provide a 

legal basis for prospectively and proverbially "Solomon-izing" the question of shareholder 

access. Even if R.C. 1701.37 were not less extensive than the common law right which it 

confirms, R.C. 1701.37 clearly and unequivocally provides that timing of a written demand 

to inspect corporate records may be "at any reasonable time" and it takes little 

imagination to envision times (around significant events in the life of a company, for 

instance) when it might be "reasonable" to inspect the corporate records even though the 

records had already been inspected twice within the last 365 days. R.C. 1701.37 cannot 

and should not be taken as a license to any court to prospectively parse or mete out 

"reasonable time" based on setting arbitrary numbers of requests permitted to be made, 

especially in equity and especially considering that R.C. 1701.37 is less extensive than the 

preexisting common law right of shareholders to inspect the records of the companies in 

which they own stock. Danziger at ¶ 10-11. As the Supreme Court of Ohio put it: 

Nor is the right [to inspect] limited to one inspection. It is an 

incident to ownership of stock, and may be exercised at any 

reasonable time so long as the relation of stockholder subsists. 

The right * * * rests * * * upon the broad ground that the 

business of the corporation is not the business of the officers 

exclusively, but is the business of the stockholders. Phoenix 

Iron Co. v. Commonwealth, 113 Pa. St., 563; Mutter v. Ry. 

Co., L. R. 38 Chy. Div., 92. 

Cincinnati Volksblatt Co. v. Hoffmeister, 62 Ohio St. 189, 199 (1900). 

{¶ 54} While inspecting twice per year may, in most years, be all that is reasonable, 

we nonetheless sustain appellant's third assignment of error in order to avoid unintended 

consequences that could harm the rights of all shareholders. 

IV. CONCLUSION 

{¶ 55} We overrule both of appellees' cross-assignments of error and appellant's 

first assignment of error. However, we sustain appellant's second and third assignments 

of error and remand this case to the Franklin County Court of Common Pleas with 

instructions that it consider the derivative action of appellant on behalf of EDCO, and in 
No. 14AP-512 21 

awarding damages, include the corporation. We also instruct the trial court that it need 

not fashion a remedy for appellant to inspect the records of EDCO, but that if it does so, it 

should not construct temporal limitations in doing so. 

Judgment affirmed in part, reversed in part; 

cause remanded with instructions.

HORTON, J., concurs. 

DORRIAN, J., concurs in part and dissents in part. 

DORRIAN, J., concurring in part and dissenting in part. 

{¶ 56} I respectfully concur in part and dissent in part. 

{¶ 57} I concur with the majority to overrule appellees' first cross-assignment of 

error. 

{¶ 58} I concur with the majority to overrule appellees' second cross-assignment of 

error. 

{¶ 59} I concur with the majority to overrule appellant's first assignment of error. 

{¶ 60} I dissent from the majority's conclusion to sustain appellant's second 

assignment of error. 

{¶ 61} I dissent from the majority's conclusion to sustain appellant's third 

assignment of error.