Boyd v. Kingdom Trust Co. (Slip Opinion) , 154 Ohio St. 3d 196 ( 2018 )

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Boyd
v. Kingdom Trust Co., Slip Opinion No. 2018-Ohio-3156.]
NOTICE
This slip opinion is subject to formal revision before it is published in an
advance sheet of the Ohio Official Reports. Readers are requested to
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
South Front Street, Columbus, Ohio 43215, of any typographical or other
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the opinion is published.
SLIP OPINION NO. 2018-OHIO-3156BOYD ET AL. v. KINGDOM TRUST COMPANY ET AL.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Boyd v. Kingdom Trust Co., Slip Opinion No.
2018-Ohio-3156.]
Certified question of state law—R.C. 1707.43 does not impose joint and several
liability on custodian of a self-directed individual retirement account
(“IRA”) that purchased illegal securities on behalf and at direction of IRA
account holders.
(No. 2017-1336—Submitted May 22, 2018—Decided August 9, 2018.)
ON ORDER from the United States Court of Appeals for the Sixth Circuit,
Certifying a Question of State Law, No. 17-3026.
_____________________
FRENCH, J.
{¶ 1} The United States Court of Appeals for the Sixth Circuit has certified
a question of Ohio law that asks whether R.C. 1707.43, a provision of the Ohio
Securities Act, imposes joint and several liability on persons who aided in the
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purchase of illegal securities but did not participate or aid in the sale of the illegal
securities. We answer the question in the negative.
FACTS AND PROCEDURAL HISTORY
{¶ 2} Ohio residents Cynthia Boyd and Thomas Flanders, the plaintiffs-
petitioners in this matter, are the alleged victims of a Ponzi scheme operated by
William Apostelos. According to petitioners, Apostelos and his associates formed
Midwest Green Resources, L.L.C., and WMA Enterprises, L.L.C., as the vehicles
for offering illegal securities to investors. Apostelos is not a party to this case.
{¶ 3} Apostelos allegedly persuaded Boyd, Flanders, and others to open
self-directed individual retirement accounts (“IRAs”) to invest in equity interests
in Midwest Green Securities and promissory notes issued by WMA Enterprises.
Boyd opened a self-directed IRA account with defendant-respondent Kingdom
Trust Company. Flanders opened a self-directed IRA account with defendant-
respondent PENSCO Trust Company, L.L.C. Once the accounts were established,
Apostelos asked investors to direct the trust companies to purchase his securities or
to execute powers-of-attorney giving him the ability to direct the trust companies
to purchase his securities using the investors’ IRA assets. Apostelos allegedly used
the money raised from these investors to pay earlier investors and promoters and to
fund his own personal expenses.
{¶ 4} After the Ponzi scheme unraveled, Boyd and Flanders filed a class-
action lawsuit in the United States District Court for the Southern District of Ohio,
Western Division, seeking to hold Kingdom Trust and PENSCO Trust liable under
the Ohio Securities Act, R.C. 1707.01 et seq., for their alleged roles in the scheme.
The complaint does not allege that the trust companies had any role in Apostelos’s
Ponzi scheme aside from purchasing the unlawful securities at the investors’
direction. Nor does it allege that the trust companies knew or had reason to know
that Apostelos was perpetrating a fraud.
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{¶ 5} Kingdom Trust and PENSCO Trust filed motions to dismiss for
failure to state a claim. The district court granted the motions. In the absence of
any allegation that the trust companies acted outside the scope of routine banking
activities, the district court held that their mere involvement in the transactions is
insufficient to impose liability on them under the Ohio Securities Act. Boyd v.
Kingdom Trust Co., 221 F.Supp.3d 975, 979 (S.D.Ohio 2016).
{¶ 6} On appeal, the United States Court of Appeals for the Sixth Circuit
noted that this court had not addressed whether the Ohio Securities Act extends
joint and several liability to persons who aided in the purchase of illegal securities.
We agreed to answer the following question, which the Sixth Circuit certified
pursuant to S.Ct.Prac.R. 9.05:
Does [R.C.] 1707.43 impose joint and several liability on a
person who, acting as the custodian of a self-directed IRA,
purchased—on behalf and at the direction of the owner of the self-
directed IRA—illegal securities?
151 Ohio St.3d 1451, 2017-Ohio-8842, 87 N.E.3d 220.
ANALYSIS
{¶ 7} The Ohio Securities Act, R.C. 1707.01 et seq., governs the sale and
purchase of securities in Ohio. The act requires securities to be registered (R.C.
1707.08 through 1707.13), imposes licensing requirements on dealers and
salespersons (R.C. 1707.14 through 1707.19), and proscribes fraudulent conduct
(R.C. 1707.44). R.C. 1707.43(A), the provision at issue here, allows the purchaser
to void an unlawful sale or contract for sale made in violation of R.C. Chapter 1707.
The statute also provides that
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[t]he 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 * * * for the full amount paid by the purchaser and for all
taxable court costs * * *.
{¶ 8} R.C. 1707.43(A); see also R.C. 1707.01(D) (defining “person” for
purposes of the Ohio Securities Act as including a limited-liability company).
{¶ 9} The certified question asks whether R.C. 1707.43(A) imposes joint
and several liability on the custodian of a self-directed IRA—here, respondents,
Kingdom Trust and PENSCO Trust—that purchased illegal securities on behalf and
at the direction of the IRA account holders—here, petitioners, Boyd and Flanders.
We hold that it does not.
{¶ 10} We start with the plain language of R.C. 1707.43(A) to determine
legislative intent. Christe v. GMS Mgt. Co., 88 Ohio St.3d 376, 377, 726 N.E.2d
497 (2000). The statute imposes joint and several liability on three types of
“persons”: (1) the person making a sale or contract for sale of illegal securities, (2)
“every person that has participated in * * * such sale or contract for sale,” and (3)
“every person that has * * * aided the seller in any way in making such sale or
contract for sale.” R.C. 1707.43(A). The plain language of R.C. 1707.43(A)
requires a person to have some nexus with the sale of illegal securities. The statute
does not extend liability to persons whose only involvement in a transaction is the
purchase of illegal securities.
{¶ 11} The General Assembly has demonstrated its intent to treat the “sale”
and “purchase” of securities as two distinct acts by defining the two terms
separately in the Ohio Securities Act. A “sale” includes “every disposition, or
attempt to dispose, of a security.” R.C. 1707.01(C)(1). A “purchase” includes
“every acquisition of, or attempt to acquire, a security.” R.C. 1707.01(GG)(1). At
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the same time, when the General Assembly intended to include both purchases and
sales in one of the act’s prohibitions, it has expressly done so. For example, the act
defines “fraud” as including “any fictitious or pretended purchase or sale of
securities.” R.C. 1707.01(J). R.C. 1707.44(N) prohibits misleading statements
from being used in the “purchase or sale of securities.” While there are various
provisions in the Ohio Securities Act in which the General Assembly included both
purchases and sales within the statute’s ambit, R.C. 1707.43(A) is not one of them.
{¶ 12} Boyd and Flanders argue that R.C. 1707.43(A)’s use of the phrase
“in any way” indicates the General Assembly’s intent to impose liability on anyone
participating in a transaction, even if the individual or entity was not involved in
and did not induce the particular sale at issue. Their selective reading of the statute,
however, omits the words that follow the phrase “in any way.” The sentence in its
entirety imposes liability on a person who “aided the seller in any way in making
such sale or contract for sale.” (Emphasis added.) R.C. 1707.43(A). The statute
does not create liability absent some conduct that aided a seller in a sale of illegal
securities.
{¶ 13} The weight of Ohio authority offers no support for petitioners’
reading of the statute. To the contrary, Ohio courts have consistently construed
R.C. 1707.43(A) as imposing liability only on persons who played a role in the sale
of unlawful securities, such as acting in concert with the seller of an unlawful
investment. See, e.g., Federated Mgt. Co. v. Coopers & Lybrand, 137 Ohio App.3d
366, 392-393, 738 N.E.2d 842 (10th Dist.2000) (bank that directly participated in
underwriting of investment and acted as financial adviser to issuer can be held liable
under R.C. 1707.43); Boland v. Hammond, 144 Ohio App.3d 89, 94, 759 N.E.2d
789 (4th Dist.2001) (defendant who relayed proposed terms of sale to investors,
arranged meetings between seller and investors, and distributed promissory notes
to investors can be held liable under R.C. 1707.43).
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{¶ 14} And Ohio courts have held that a financial institution’s mere
participation in a transaction, absent any aid or participation in the sale of illegal
securities, does not give rise to liability under R.C. 1707.43(A). “ ‘[T]he
willingness of a bank to become the depository of funds does not amount to a
personal participation or aid in the making of a sale.’ ” Wells Fargo Bank v. Smith,
12th Dist. Brown No. CA2012-04-006, 2013-Ohio-855, ¶ 29, quoting Hild v.
Woodcrest Assn., 59 Ohio Misc. 13, 30, 391 N.E.2d 1047 (C.P.1977); see also
Boomershine v. Lifetime Capital, Inc., 2d Dist. Montgomery No. 22179, 2008-
Ohio-14, ¶ 15 (plaintiffs failed to show that bank serving as escrow agent aided in
the sale of investments).
{¶ 15} Nevertheless, with the plain language of the statute and the weight
of Ohio authority against them, petitioners argue that in any event, their complaint
contains allegations that the trust companies worked in concert with Apostelos to
effectuate the sale of his illegal securities. Nothing in our holding today would
insulate from liability a self-directed IRA custodian who colludes with the seller in
an unlawful sale of securities or actively participates or aids in the sale of illegal
securities. But the certified question before us is limited to the liability of a self-
directed IRA custodian whose only alleged participatory conduct was the purchase
of illegal securities on behalf and at the direction of the owner of a self-directed
IRA. We leave it for the Sixth Circuit to decide whether the facts as alleged in
petitioners’ complaint are sufficient to survive dismissal at the pleading stage under
the legal standard we announce today.
CONCLUSION
{¶ 16} We answer the certified question in the negative and conclude that
R.C. 1707.43 does not impose joint and several liability on a person who, acting as
the custodian of a self-directed IRA, purchased—on behalf and at the direction of
the owner of the self-directed IRA—illegal securities.
So answered.
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O’CONNOR, C.J., and O’DONNELL, KENNEDY, FISCHER, DEWINE, and
DEGENARO, JJ., concur.
_________________
Sebaly, Shillito & Dyer, Toby K. Henderson, and Scott S. Davies, for
petitioners.
Ulmer & Berne, L.L.P., Frances Floriano Goins, and Daniela Paez, for
respondent Kingdom Trust Company.
Porter, Wright, Morris & Arthur, L.L.P., and Caroline H. Gentry; and
Shartsis Friese, L.L.P., Jahan P. Raissi, and Roey Z. Rahmil, for respondent
PENSCO Trust Company, L.L.C.
Womble Bond Dickinson, L.L.P., Katrina L.S. Caseldine, Kevin A. Hall,
and M. Todd Carroll, in support of respondents for amicus curiae Retirement
Industry Trust Association.
Meyer Wilson Co., L.P.A., and David P. Meyer, in support of neither party
for amicus curiae Public Investors Arbitration Bar Association.
_________________
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