ZURZ v. MEYHEW, 23834 (10-29-2010)

d restitution or rescission if it is "satisfied with the sufficiency of the director's request for restitution or rescission * * * and with the sufficiency of the proof of a substantial violation of any provision of [the Act] or of the use of any act, practice, or transaction declared to be illegal or prohibited or defined as fraudulent by those sections or rules adopted under those sections by the division of securities, to the material prejudice of a purchaser or holder of securities." R.C. 1707.261(B). Recovery by the injured purchaser or holder of securities is limited to the person's purchase price for the fraudulent securities. R.C. 1707.261(D).

{¶ 36} The Director may further ask the court to appoint a receiver for a violator of the Ohio Securities Act. R.C. 1707.27. A receiver appointed in accordance with R.C. 1707.27 is empowered "to sue for, collect, receive, and take into the receiver's possession all the books, records, and papers of the person [violator] and all rights, credits, property, and choses in action acquired by the person by means of any such act, practice, or transaction, and also all property with which the property has been mingled, if the property cannot be identified in kind because of the commingling, and with power to sell, convey, and assign the property, and to hold and dispose of the proceeds under the direction of the court of common pleas." Id. The decision whether to appoint a receiver is a matter left to the trial court's sound discretion. Page v. AEI Group, Inc. (Apr. 30, 1991), Franklin App. No. 90AP-151.

{¶ 37} The Director asserts that the plain language of R.C. 1707.26 permits the insurance proceeds to be subject to a restraining order. She contends that the portion of R.C. 1707.26 which permits the court to "order such other equitable relief as the facts warrant" is not limited to the violator and the violator's "agents, employees, partners, officers, directors, and shareholders." As stated by the Director, "[t]he second clause makes no reference to the first clause, and cannot be interpreted as qualifying or otherwise limiting the first clause of R.C. 1707.26." She argues that any other reading renders the second clause ("such other equitable relief") mere surplusage. That is, the Director can obtain an injunction by R.C. 1707.26, can obtain rescission and restitution by R.C. 1707.261, and can seek the appointment of a receiver with broad powers to sue by R.C. 1707.27; therefore, the second clause must grant the Director the authority to seek other equitable relief from others "as the facts warrant."

{¶ 38} We disagree with the Director's expansive reading of R.C. 1707.26. The remedial provisions set forth in R.C. 1707.26, R.C. 1707.261, and R.C. 1707.27, authorize the Director to file an action against violators and to seek certain remedies (rescission and restitution) against those violators for damages caused by the securities violations. The first clause of R.C. 1707.26 requires the common pleas court ("the court shall grant") to impose an injunction against persons upon proof by the Director that such person "has engaged in, is engaging in, or is about to engage in, any deceptive, fraudulent, or manipulative act, practice, or transaction, in violation of sections 1707.01 to 1707.45 of the Revised Code." The second clause permits the common pleas court to order "such other equitable relief as the facts warrant."

{¶ 39} However, there is no implication in R.C. 1707.26 that "such other equitable relief" includes bringing suit against third parties for equitable relief. R.C. 1707.26 authorizes suit against violators. The second clause merely adds that, in addition to the mandatory injunction, the court "may order" additional relief against those violators.

{¶ 40} Such a reading of R.C. 1707.26 is consistent with the rule of ejusdem generis, which means "of the same kind or species." Under that rule, "where in a statute terms are first used which are confined to a particular class of objects having well-known and definite features and characteristics, and then afterward a term having perhaps a broader signification is conjoined, such latter term is, as indicative of legislative intent, to be considered as embracing only things of similar character as those comprehended by the preceding limited and confined terms." State v. Aspell (1967), 10 Ohio St.2d 1, paragraph two of the syllabus. See, also, State v. Collier, Montgomery App. No. 22686, 2010-Ohio-4039, ¶ 20, and State v. Maxwell (Apr. 13, 1988), Medina App. No. 1646, both quoting Aspell. R.C. 1707.26 refers to an injunction, which must be imposed if the Director satisfies its burden under that statute, and "such other equitable relief," which is discretionary. To construe "such other equitable relief" as encompassing the authority to sue third-parties who hold assets procured by securities fraud would extend the meaning of "such other equitable relief" beyond the statute's preceding reference to one type of equitable relief, an injunction. In addition, the first clause of R.C. 1707.26 specifically states that the injunction must be imposed against "such persons" (i.e. violators) and other specifically identified persons; if the legislature had intended injunctive relief to be available against additional parties, the General Assembly could have (1) chosen not to limit the first clause to "such persons" and the list of persons that follow or (2) provided that the court could order "such other equitable relief" as the facts warrant" against such persons or any other person.

{¶ 41} We are further guided by the Supreme Court of Ohio's decision in State, Dept. of Commerce, Division of Securities v. Buckeye Finance Corp. (1978), 54 Ohio St.2d 407, which addressed the scope of "such other equitable relief in R.C. 1707.26. In Buckeye Finance, the Director and the defendants agreed to a consent order under which Buckeye would be liquidated according to express terms under the court's supervision. The Director subsequently moved to file an amended complaint, seeking an order that would hold the individual defendants (who were all alleged to be violators of the Ohio Securities Act) personally liable to pay money to all purchasers of the debentures which had allegedly been sold illegally; establish a "plan of rescission" to allow all debenture holders to recover the purchase price, plus interest, from the individual defendants; and require the individual defendants to put the full amount of the purchase price of the debentures, plus interest, in escrow. The individual defendants argued that there was no authority for the Director to seek that form of relief. ( Buckeye Finance was decided prior to the enactment of R.C. 1707.261, which expressly authorized the Director to seek restitution and rescission.) The Director asserted that the claimed relief was authorized by the phrase, "may order such other relief as the facts warrant," contained in that version of R.C. 1707.26. The trial court denied the Director's motion. {¶ 42} On appeal, the Supreme Court held that the Director, as an administrative agent of the State, did not have statutory authority under R.C. 1707.26 to sue for rescission and restitution on behalf of purchasers of securities. The court explained that "[i]t would be unreasonable to infer such authority from the general language of R.C. 1707.26, when, in other sections of the code, the General Assembly has taken pains to create similar causes of action in purchasers of securities explicitly, rather than by implication."

{¶ 43} Although Buckeye Financial's specific holding has limited applicability today because of the enactment of R.C. 1707.261, it demonstrates the restrictive interpretation given to the phrase, "may order such other equitable relief as the facts warrant." Because restitution and rescission were remedies expressly available to private plaintiffs, the Supreme Court excluded those remedies from "such other relief" (even against alleged violators), thereby indicating that "such other relief" modifies the type of relief as opposed to the individuals against whom the "other relief" may be sought. Given this reading of "such other relief as the facts warrant," we decline to read "such other equitable relief as the facts warrant" to include the authority to sue third parties who are not violators of the Ohio Securities Act.

{¶ 44} The Director further argues that, without the authority to restrain ill-gotten gains, wherever they may be, the ability of the receiver (appointed under R.C. 1707.27) to take all assets derived from the securities violations would be circumvented. First, whether this is true (and, as discussed below, we render no such advisory opinion), the authority granted to an executive agency of the State is always a policy decision of the legislature.

{¶ 45} Moreover, as recognized by the Director, "the Ohio Securities Act provides investors with their own separate civil remedy for securities violations. R.C. 1707.43. This civil remedy permits recovery against a broader class of people than the people against whom rescission or restitution can be ordered under R.C. 1707.261." (Director's App. Brf., p. 8, n. 6.) Specifically, R.C. 1707.43 provides:

{¶ 46} "(A) Subject to divisions (B) and (C) of this section, every sale or contract for sale made in violation of Chapter 1707. of the Revised Code, is voidable at the election of the purchaser. The person making such sale or contract for sale, and every person that has participated in or aided the seller in any way in making such sale or contract for sale, are jointly and severally liable to the purchaser, in an action at law in any court of competent jurisdiction, upon tender to the seller in person or in open court of the securities sold or of the contract made, for the full amount paid by the purchaser and for all taxable court costs, unless the court determines that the violation did not materially affect the protection contemplated by the violated provision." R.C. 1707.43(A).

{¶ 47} Accordingly, as recognized in Buckeye Financial, the General Assembly has expressly granted rights to private aggrieved individuals (i.e., a remedy against those who participated or aided in the sale of unregistered securities) which it has not granted to the Director as part of the State's enforcement powers. In such circumstances, we cannot reasonably infer that the legislature intended to provide those same rights to the Director.

{¶ 48} Finally, as stated above, R.C. 1707.27 provides that a receiver appointed by the court, upon application by the Director, has the authority " to sue for, collect, receive, and take into the receiver's possession" all of the books, records, and papers of the Securities Act violator; all rights, credits, property, and choses in action acquired by means of any such violation; and also all property with which the property has been mingled. (Emphasis added.) The receiver can further "sell, convey, and assign the property," and "hold and dispose of the proceeds" under the court's direction. Thus, as stated by the Director, "[t]he restitution is to be determined by the receiver and the receiver has the authority to marshal the assets under the direction of the court." (Director's App. Brf, p. 6) The Director does not.

{¶ 49} Accordingly, we conclude that the Director's right to pursue an injunction under R.C. 1707.26 is limited to actions against "any person [who] has engaged in, is engaging in, or is about to engage in, any deceptive, fraudulent, or manipulative act, practice, or transaction, in violation of sections 1707.01 to 1707.45 of the Revised Code" and that person's "agents, employees, partners, officers, directors, and shareholders;" the court's authority to order "such other equitable relief as the facts warrant" is also limited to those specified persons. Moreover, R.C. 1707.261 allows the court to order restitution and rescission only against "the defendant or defendants that are subject to the injunction." R.C. 1707.261.

{¶ 50} Indeed, we believe that Director accurately described its authority under R.C. 1707.26, 1707.261, and 1707.27 when it stated to the trial court:

{¶ 51} "R.C. 1707.26 allows the Director of Commerce, upon proof of violations of the Ohio Securities Act, to petition the court for an injunction or other equitable relief. Upon the granting of such injunction or other equitable relief, R.C. 1707.261 allows the Director to ask the court to order the rescission or restitution of all securities sold in violation of the Ohio Securities Act. Once this order is issued, a receiver appointed pursuant to R.C. 1707.27 may then sue for, collect, and distribute the funds to the investors.

{¶ 52} "* * * Under R.C. 1707.27, the receiver has the ability to sue, collect, receive, and take possession of all property, including co-mingled property and disperse the proceeds under the direction of the court. The amount of restitution owed to each investor is determined by the receiver under the direction of the court. The order of restitution would only state that the investors were entitled to restitution not to exceed the amount of the investor's investment. The order would not state that Mrs. Dillabaugh or The Hartford Life Accident Insurance Company, for example, owed an amount certain. Instead, the receiver would bring an action as appropriate that would include full discovery, and a decision on the merits of each individual claim or defense." (Emphasis added.) (Doc. # 9)

{¶ 53} Such a reading of R.C. 1707.26 does not "circumvent" the ability of the receiver to take all assets derived from the securities violations, as the Director suggests. Because the Director need not establish the merits of the individual claims as part of its suit under R.C. 1707.26, we see no reason why there would necessarily be a significant delay between the filing of the Director's action against the violators and the trial court's subsequent order of an injunction against the violators and the appointment of a receiver. At that juncture, the receiver could promptly pursue any claims against third parties who hold proceeds of the securities fraud and could seek an injunction, if necessary, against those parties.

{¶ 54} Accordingly, the trial court erred in imposing an injunction against Mrs. Dillabaugh and Ms. Long as requested by the Director. Such a request was the province of a receiver appointed under R.C. 1707.27. {¶ 55} The cross-assignments of error are sustained.

III

{¶ 56} The Director raises three assignments of error. They state:

{¶ 57} "THE LOWER COURT ERRED IN FINDING APPELLANT/CROSS-APPELLEE, A STATE REGULATOR OF SECURITIES, A CREDITOR UNDER R.C. 3911.10."

{¶ 58} "THE LOWER COURT ERRED IN FINDING THAT R.C. 3911.10 PROHIBITED APPELLANT/CROSS-APPELLEE FROM OBTAINING FROM THE ESTATE OF ROY G. DILLABAUGH THE PROCEEDS OF INSURANCE POLICIES PURCHASED BY ROY G. DILLABAUGH ON HIMSELF WITH STOLEN INVESTOR MONIES."

{¶ 59} "THE LOWER COURT ERRED IN FINDING THAT THE APPLICATION OF R.C. 3911.10 COULD NOT BE OVERCOME BY THE CREATION OF A CONSTRUCTIVE TRUST."

{¶ 60} R.C. 3911.10 provides:

{¶ 61} "All contracts of life or endowment insurance or annuities upon the life of any person, or any interest therein, which may hereafter mature and which have been taken out for the benefit of, or made payable by change of beneficiary, transfer, or assignment to, the spouse or children, or any persons dependent upon such person, or an institution or entity described in division (B)(1) of section 3911.09 of the Revised Code, or any creditor, or to a trustee for the benefit of such spouse, children, dependent persons, institution or entity, or creditor, shall be held, together with the proceeds or avails of such contracts, subject to a change of beneficiary if desired, free from all claims of the creditors of such insured person or annuitant. Subject to the statute of limitations, the amount of any premium upon such contracts, endowments, or annuities, paid in fraud of creditors, with interest thereon, shall inure to their benefit from the proceeds of the contracts, but the company issuing any such contract is discharged of all liability thereon by the payment of its proceeds in accordance with its terms, unless, before such payment, written notice is given to it by a creditor, specifying the amount of the claim and the premiums which the creditor alleges have been fraudulently paid."

{¶ 62} To qualify for protection under R.C. 3911.10, the contract must be the proper type of insurance policy or annuity on the life of insured/annuitant, and the beneficiary must fall within one of several categories of people, including the spouse, children, and dependents of the insured or annuitant. If R.C. 3911.10 applies, the proceeds of the contract will be protected from "all claims" of the insured's or annuitant's "creditors." In re Schramm (B.A.P. C.A.6, 2010), 431 B.R. 397, 402. R.C. 3911.10, however, exempts from its protection the amount of any premium on the contract which was "paid in fraud of creditors," with interest. Such premiums "shall inure to [the creditors'] benefit" from the proceeds of the life insurance or annuity.

{¶ 63} The parties dispute whether the Director, not the receiver appointed by the trial court, is a "creditor" under R.C. 3911.10. The dispute is framed as such because the Director sought to enjoin all of the proceeds of the life insurance policies as part of its request for a preliminary injunction (which was to continue until an injunction against the Estate of Roy Dillabaugh and The Dillabaugh Group was ordered and a receiver could be appointed). Accordingly, at the time that the parties raised whether all of the proceeds of the life insurance policies could be enjoined, it was the Director, not the receiver, who was seeking the injunction. The trial court, faced with that issue in the motions for summary judgment, determined that the Director could pursue a preliminary injunction against "the necessary parties," but that the injunction was limited, with respect to Mrs. Dillabaugh and Lorne Dillabaugh, to the amount of premiums paid, consistent with R.C. 3911.10. In doing so, the Court concluded that the Director was acting as a "creditor."

{¶ 64} Because we have concluded that the Director lacked the authority to sue third-parties, such as Mrs. Dillabaugh and Ms. Long, under R.C. 1707.26, the Director necessarily lacked the authority to seek a temporary restraining order and a preliminary injunction against them to prevent them from disposing of the proceeds of the insurance policy. Accordingly, with respect to those parties, the question of whether the Director was a "creditor" under R.C. 3911.10 is moot. {¶ 65} In its judgment entry, the trial court applied its decision regarding the Director's ability to seek a preliminary injunction against Mrs. Dillabaugh, Lorne Dillabaugh, Ms. Long, and Hartford to the Receiver. The trial court ordered, in part:.

With respect to Ms. Long and Hartford, the Director argued that the trial court erred in holding that the life insurance proceeds held by them were protected by R.C. 3911.10. We note that the trial court held the opposite, i.e., that R.C. 3911.10 did not apply to protect the proceeds held by Ms. Long and Hartford. Accordingly, the Director's assignment of error with respect to these proceeds could be overruled on that basis, as well.

{¶ 66} "* * * [A] Receiver appointed pursuant to R.C. 1707.27 would not be permitted to pursue the life insurance proceeds held by Alice Jane Dillabaugh and Lorne Dillabaugh (in excess of the amount of the premiums) under R.C. 3911.10. Thus, pursuant to R.C. 3911.10 the maximum amount of those proceeds the Receiver appointed by this Court will be permitted to pursue as part of the receivership estate is the amount paid in premiums for the insurance policies for which Defendants Alice Jane Dillbaugh and Lorne Dillabaugh are the named [beneficiaries]. * * * The Court makes no findings at this time with respect to whether the receivership estate does or should include any specific amounts of the insurance proceeds, only that the Receiver may not seek proceeds from Alice Jane Dillabaugh and Lorne Dillabaugh in an amount in excess of the premiums paid on those policies. The Receiver will be required to establish its right to recover such proceeds as it is permitted to pursue by whatever means it deems appropriate, including but not limited to an action to recover such proceeds.

{¶ 67} "* * * Therefore, it is ORDERED and ADJUDGED that Kimberly Mayhew, in her capacity as administrator of the Estate of Roy G. Dillabaugh, and The Dillabaugh Group are pemanently enjoined from further violations of the Ohio Securities Act; that a Receiver is hereby appointed who will serve pursuant to the jurisdiction of this Court and will have all the powers, authority, and responsibilities granted by R.C. 1707.27; and that an Order of Restitution is hereby issued against Kimberly Mayhew, in her capacity as administrator of the Estate of Roy G. Dillabaugh, and the Dillabaugh Group in an amount to be determined by Receiver appointed by this Court.

{¶ 68} "The Court hereby appoints Robert G. Hanseman [handwritten] as Receiver, and orders the Receiver to take possession of all assets, properties, books and records of Roy G. Dillabaugh and The Dillabaugh Group, and grants the Receiver exclusive authority to manage and operate said business entities and wind up the affairs of Roy G. Dillabaugh and The Dillabaugh Group and to perform all other duties as directed by this Court as authorized in R.C. 1707.27. * * *

{¶ 69} "The Receiver is authorized to trace the investors' monies, and collect all assets, including but not limited to, any monies of Roy G. Dillabaugh and The Dillabaugh Group or the investors consistent with Ohio law. * * *

{¶ 70} "It is further ORDER and ADJUDGED that, pursuant to R.C. 1707.26 and 1707.27, that the Receiver is authorized to pursue collection of the insurance proceeds in the possession of Defendants Alice Jane Dillabaugh and Lorne Dillabaugh up to the amount of premiums paid on the policies from which those proceeds were paid in the amounts of $564,788.58 and $55,753.28. However, the amount authorized in regard to Alice Jane Dillabaugh may be adjusted upon application to the Court by the Receiver. * * *"

{¶ 71} The trial court's order implicitly found that, like the Director, the receiver was also a creditor under R.C. 3911.10. However, unlike the Director, the Receiver is an appointee of the court. Tonti v. Tonti (Ohio App. Nov. 2, 1951), 118 N.E.2d 200, 202 ("the receiver is merely the administrative arm of the court who takes charge of the assets of the partnership for the purpose of conserving them to the ends of equity and for the benefit of creditors generally"), citing Coe v. Columbus P. I. R. Co. (1859), 10 Ohio St. 372, and Merchants' Nat. Bank of Louisville v. McLeod (1882), 38 Ohio St. 174. Although the purpose of the receiver is to marshal and preserve assets until they can be equitably distributed, the receiver's position is not identical to that of the Director, and the trial court erred in conflating the two. {¶ 72} At this juncture, the receiver has not pursued an action against Mrs. Dillabaugh and Lorne Dillabaugh. Consequently, the trial court should not have rendered any ruling on whether the Receiver's ability to recover all of the proceeds of the life insurance policies held by them was limited by R.C. 3911.10. Similarly, the trial court should not have determined, in the absence of an action by the receiver, whether the receiver could recover the full amount of the life insurance proceeds under a constructive trust theory. Stated simply, such issues were not ripe for determination by the trial court.

{¶ 73} We note that Lorne Dillabaugh and Hartford did not file cross-appeals to challenge the Director's statutory authority to seek an injunction against them. Under App. R. 3(C), a notice of cross appeal must be filed by a party "who intends to defend a judgment or order against an appeal taken by an appellant and who also seeks to change the judgment or order * * *." (Emphasis added.) In the absence of notices of cross-appeal by these parties, this Court lacks jurisdiction to reverse the imposition of the injunctions against them. Yates v. Kanani, Montgomery App. No. 23492, 2010-Ohio-2631, ¶ 32. Accordingly, we will not disturb the trial court's injunctions against them.

{¶ 74} Nevertheless, we overrule the Director's assignments of error with respect to Lorne Dillabaugh and Hartford. Having determined that the Director lacks the authority to pursue its claims against them, we will not determine the extent of its authority on the assumption that she could have raised those claims. If the receiver wishes to pursue all of the proceeds of the life insurance policies held by Mrs. Dillabaugh and Lorne Dillabaugh, he may attempt to do so in his own action, and the trial court may address the applicability of R.C. 3911.10, if raised, at that time. {¶ 75} The Director's assignments of error are overruled.

IV

{¶ 76} The trial court's judgment will be reversed to the extent that it (1) imposed an injunction on the life insurance proceeds held by Mrs. Dillabaugh and Ms. Long, and (2) ordered that, pursuant to R.C. 3911.10, the receiver could recover no more than the amount of premiums paid for the life insurance policies held by Mrs. Dillabaugh and Lorne Dillabaugh. Because the issue of the receiver's ability to recover all of the proceeds from the life insurance policies held by Mrs. Dillabaugh and Lorne Dillabaugh was not properly before the trial court, we state no opinion on the applicability of R.C. 3911.10.

{¶ 77} Since Lorne Dillabaugh and Hartford did not cross-appeal to challenge the Director's statutory authority to seek an injunction against them, the trial court's injunctions against them are affirmed. {¶ 78} The matter will be remanded to the trial court for further proceedings consistent with this opinion.

Our holding is not meant to limit these defendants' ability to seek relief from judgment upon remand to the trial court.

{¶ 79} As discussed above, this appellate record does not reflect the status of any actions taken by the receiver in state or federal litigation. Our mandate reversing the injunctions on the respective portions of the life insurance proceeds held by Mrs. Dillabaugh and Ms. Long that remain subject to injunction shall take effect 30 days after the date of this Opinion.

DONOVAN, P.J. and FAIN, J., concur.

Copies mailed to:

Cheryl R. Hawkinson Dennis P. Smith Ralph W. Kohnen Eric K. Combs Robert E. Dintaman, Jr. W. Randall Rock Hon. Timothy N. O'Connell