Paterson v. Equity Trust Co. , 2012 Ohio 860 ( 2012 )

[Cite as Paterson v. Equity Trust Co., 2012-Ohio-860.]
STATE OF OHIO ) IN THE COURT OF APPEALS
)ss: NINTH JUDICIAL DISTRICT
COUNTY OF LORAIN )
DOUGLAS M. PATERSON, ET AL. C.A. No. 11CA009993
Appellants
v. APPEAL FROM JUDGMENT
ENTERED IN THE
EQUITY TRUST COMPANY COURT OF COMMON PLEAS
COUNTY OF LORAIN, OHIO
Appellee CASE No. 09CV160723
DECISION AND JOURNAL ENTRY
Dated: March 5, 2012
WHITMORE, Presiding Judge.
{¶1} Plaintiff-Appellants, Douglas Paterson and Douglas Paterson as Beneficiary of
Equity Trust Company FBO Douglas Paterson IRA No. 70492 (collectively “Paterson”), appeal
from the judgment of the Lorain County Court of Common Pleas, granting summary judgment in
favor of Defendant-Appellee, Equity Trust Company (“Equity Trust”). This Court affirms.
I
{¶2} Paterson acquired a public retirement fund after he spent numerous years as a
public employee in Michigan. Seeking help with bookkeeping and investment opportunities,
Paterson hired Jeff Sadlak, an investment advisor for whom Paterson had received a
recommendation. Sadlak eventually suggested that Paterson invest in a real estate venture
through a company named Williamston Holdings, LLC (“Williamston”). According to Sadlak,
he had identified a piece of property in Williamston, Michigan worth far more than the debt due
on the land. Williamston would use its investors’ funds to eliminate the debt and flip the
2
property for a large profit. Williamston’s investors would then receive back their initial
investments as well as a portion of the profit. Sadlak informed Paterson that Paterson would
need to transfer funds from his public retirement account to a self-directed Individual Retirement
Account (“IRA”) to facilitate the investment with Williamston. Paterson agreed and signed an
IRA account application with Equity Trust on January 29, 2007.
{¶3} On February 13, 2007, Equity Trust received two letters and a direction of
investment form, requesting the transfer of $66,666.66 from Paterson’s IRA to Williamston. The
second letter indicated that the transfer to Williamston represented a loan and Equity Trust would
be forwarded a properly executed loan agreement as well as a security agreement, pledging
shares of Williamston as security for the loan. The letters and the form all bore Paterson’s
signature, but he never signed the documents. Rather, Sadlak signed Paterson’s name on the
documents and sent them to Equity Trust. Pursuant to the letters and the form, Equity Trust
transferred $66,666.66 to Williamston. Paterson’s quarterly statements from Equity Trust
reflected the transfer to Williamston.
{¶4} Equity Trust never received a promissory note or security agreement as collateral
for the loan. In early summer 2008, Paterson learned that the property in which he had invested
through Williamston was being foreclosed upon and that he did not have any secured ownership
interest in the property. Paterson ultimately asked Equity Trust to reimburse the $66,666.66 it
transferred to Williamston because he never signed for the transfer. Equity Trust refused.
{¶5} On February 12, 2009, Paterson filed suit against Equity Trust for conducting a
sale in violation of Ohio’s securities laws as well as for breach of contract, breach of the implied
covenant of good faith and fair dealing, breach of fiduciary duty, and intentional and negligent
misrepresentation. Equity Trust filed a motion for summary judgment on December 30, 2010.
3
Paterson responded in opposition on February 22, 2011, and Equity Trust filed its reply brief on
March 15, 2011. The trial court determined that no genuine issues of material fact existed,
entered summary judgment in favor of Equity Trust, and dismissed all of Paterson’s claims.
{¶6} Paterson now appeals from the trial court’s judgment and raises three assignments
of error for our review.
II
Assignment of Error Number One
THE TRIAL COURT ERRED WHEN IT GRANTED SUMMARY JUDGMENT
FOR EQUITY TRUST COMPANY ON COUNT V, MR. PATERSON’S
CLAIM THAT EQUITY TRUST WAS LIABLE TO HIM FOR ITS
VIOLATION OF O.R.C. 1707 ET SEQ., THE OHIO SECURITIES ACT,
BECAUSE GENUINE ISSUES OF MATERIAL FACT EXIST AS TO
WHETHER MR. PATERSON’S INVESTMENT WAS A SECURITY
REQUIRED TO BE REGISTERED AND WHETHER EQUITY TRUST’S
ACTS CONSTITUTE AIDING OR PARTICIPATING IN THE SALE TO HIM
OF THAT SECURITY.
{¶7} In his first assignment of error, Paterson argues that the trial court erred by
concluding that Equity Trust was entitled to summary judgment on his claim under R.C. 1707 et
seq.1 Specifically, he argues that genuine issues remain as to whether Equity Trust aided or
participated in the sale of an unregistered security in violation of R.C. 1707.44. We disagree.
{¶8} This Court reviews an award of summary judgment de novo. Grafton v. Ohio
Edison Co., 77 Ohio St.3d 102, 105 (1996). Pursuant to Civ.R. 56(C), summary judgment is
proper if:
(1) No genuine issue as to any material fact remains to be litigated; (2) the
moving party is entitled to judgment as a matter of law; and (3) it appears from
the evidence that reasonable minds can come to but one conclusion, and viewing
1
For clarification purposes, this Court notes that, although Paterson’s captioned assignment of
error references Count V of his complaint, the remaining content of his assignment of error and
his argument actually address Count VI.
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such evidence most strongly in favor of the party against whom the motion for
summary judgment is made, that conclusion is adverse to that party.
Temple v. Wean United, Inc., 50 Ohio St.2d 317, 327 (1977). The party moving for summary
judgment bears the initial burden of informing the trial court of the basis for the motion and
pointing to parts of the record that show the absence of a genuine issue of material fact. Dresher
v. Burt, 75 Ohio St.3d 280, 292-293 (1996). Specifically, the moving party must support the
motion by pointing to some evidence in the record of the type listed in Civ.R. 56(C). Id. Once
this burden is satisfied, the non-moving party bears the burden of offering specific facts to show
a genuine issue for trial. Id. at 293. The non-moving party may not rest upon the mere
allegations and denials in the pleadings but instead must point to or submit some evidentiary
material that demonstrates a genuine dispute over a material fact. Henkle v. Henkle, 75 Ohio
App.3d 732, 735 (12th Dist.1991).
{¶9} R.C. 1707.44(C)(1) prohibits any person from knowingly selling any unregistered
security that is not exempt from registration. R.C. 1707.43(A) affords the purchaser of a security
sold in violation of R.C. Chapter 1707 a remedy in the form of voiding the sale. It also provides
that:
[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, 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). The sale of a security in violation of R.C. 1707.44(C)(1) materially affects the
protection contemplated by that provision. Pencheff v. Adams, 5 Ohio St.3d 153, 154-155
(1983). The phrase “participated in or aided the seller in any way” is “broad in scope” and must
5
be applied as such. Johnson v. Church of the Open Door, 179 Ohio App.3d 532, 2008-Ohio-
6054, ¶ 23 (9th Dist.).
{¶10} Paterson’s theory here was that Sadlak sold him an investment in Williamston that
was required to be registered as a security. R.C. 1707.01(B) defines a security as follows:
“Security” means any certificate or instrument, or any oral, written, or electronic
agreement, understanding, or opportunity, that represents title to or interest in, or
is secured by any lien or charge upon, the capital, assets, profits, property, or
credit of any person or of any public or governmental body, subdivision, or
agency. It includes shares of stock, certificates for shares of stock, an
uncertificated security, membership interests in limited liability companies,
voting-trust certificates, warrants and options to purchase securities, subscription
rights, interim receipts, interim certificates, promissory notes, all forms of
commercial paper, evidences of indebtedness, bonds, debentures, land trust
certificates, fee certificates, leasehold certificates, syndicate certificates,
endowment certificates, interests in or under profit-sharing or participation
agreements, interests in or under oil, gas, or mining leases, preorganization or
reorganization subscriptions, preorganization certificates, reorganization
certificates, interests in any trust or pretended trust, any investment contract, any
life settlement interest, any instrument evidencing a promise or an agreement to
pay money, warehouse receipts for intoxicating liquor, and the currency of any
government other than those of the United States and Canada, but sections
1707.01 to 1707.45 of the Revised Code do not apply to the sale of real estate.
R.C. 1707.01(B). In the court below, Paterson described his alleged security as a note, an
instrument closely resembling a promissory note, and a promissory investment. He also quoted
the portion of R.C. 1707.01(B) that includes “any investment contract” as a form of security, but
did not elaborate on that point. That is, he did not set forth the test that applies to investment
contracts or analyze whether he and Sadlak/Williamston had an investment contract. See, e.g.,
Cartwight v. Falls Heating & Cooling, Inc., 9th Dist. No. 16079, 1994 WL 286280, *4 (June 29,
1994) (setting forth the test for investment contracts). In general, his argument as to why his
investment with Williamston was a “security” was ill-developed.
{¶11} There is no dispute that Equity Trust did not sell Paterson the alleged security
here. At most, Equity Trust aided or participated in the sale of a security between Paterson and
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Sadlak/Williamston. The record, however, does not contain any instrument reflecting a sale
from Sadlak/Williamston to Paterson. The direction of investment form filed with Equity Trust
contains the following notation under a section instructing the account holder to list any titles or
documents that require signing: “note documents will [be] following receipt of transfer of funds
closing will take place when funds are received and then mailed to [Equity Trust].” Further, the
letter accompanying the form indicates that a “[p]roperly executed loan agreement” and
“[s]ecurity agreement pledging the units/shares of Williamston” would be forwarded to Equity
Trust after Williamston received the disbursement. The “Borrower’s Signature” block on the
direction of investment form is blank. In his deposition, Paterson described his understanding of
the Williamston investment, but did not testify that he signed any loan or security agreement
with Sadlak, Williamston, or the owner of the property Williamston apparently sought to
purchase as an investment. Moreover, Equity Trust never received any loan or security
agreement after transferring the funds.
{¶12} “R.C. 1707.01(B) provides the general definition of a security, which can be
applied to any certificate or instrument to determine whether it is a security, and the second
sentence provides a list of certificates and instruments that are presumptively securities.”
Perrysburg Twp. v. Rossford, 103 Ohio St.3d 79, 2004-Ohio-4362, paragraph one of the
syllabus. More specific tests apply depending upon the nature of the alleged security. See, e.g.,
id. at ¶ 12-14, citing Reeves v. Ernst & Young, 494 U.S. 56, 66-67 (1990) (setting forth the
“family-resemblance test” for notes); Cartwright at *4 (June 29, 1994) (setting forth the test for
investment contracts). The problem here is that Paterson never made any instrument a part of the
record. To the extent he now tries to categorize his arrangement with Sadlak/Williamston as an
“investment contract,” he did not develop that argument in the court below. See Nat. City Mtge.
7
v. Skipper, 9th Dist. No. 24772, 2009-Ohio-5940, ¶ 24 (refusing to consider argument on appeal
that was not developed in the trial court at the summary judgment stage). He only set forth the
law that must be applied to analyze “whether a particular note is a security” and argued about
“the note” here in his memorandum in opposition. Yet, there is no evidence that any such note
exists. The documentary evidence presented only shows that Equity Trust disbursed $66,666.66
to Williamston from Paterson’s self-directed IRA with the expectation that proof of a security
interest would be forthcoming.
{¶13} In the absence of proof that there was a “security” here, Equity Trust could not be
liable for aiding or participating in the sale of an unregistered security. Paterson failed to show
that a genuine issue of material fact exists with regard to whether he purchased a security.
Accordingly, the trial court did not err by granting summary judgment in favor of Equity Trust
on Paterson’s claim under R.C. 1707.43(A). Paterson’s first assignment of error is overruled.
Assignment of Error Number Two
THE TRIAL COURT ERRED WHEN IT GRANTED SUMMARY JUDGMENT
FOR EQUITY TRUST COMPANY ON COUNT III, MR. PATERSON’S
BREACH OF FIDUCIARY DUTY CLAIM, BECAUSE WHETHER EQUITY
TRUST OWED MR. PATERSON A FIDUCIARY DUTY IN THE
CIRCUMSTANCES AND, IF SO, WHETHER EQUITY TRUST BREACHED
THIS FIDUCIARY DUTY, ARE FACTUAL QUESTIONS.
{¶14} In his second assignment of error, Paterson argues that the trial court erred by
concluding that Equity Trust was entitled to summary judgment on his claim for breach of
fiduciary duty. Specifically, he argues that genuine issues remain as to whether Equity Trust, as
his agent, failed to exercise reasonable care to protect his IRA account. We disagree.
{¶15} Because this assignment of error also stems from the trial court’s summary
judgment decision, we incorporate the standard of review set forth in the first assignment of
error.
8
A claim for breach of fiduciary duty is similar to one for ordinary negligence,
with the difference being a need to establish that the duty arose out of a fiduciary
relationship. A fiduciary relationship is defined as one in which special
confidence and trust [are] reposed in the integrity and fidelity of another and there
is a resulting position of superiority or influence, acquired by virtue of this special
trust.
(Internal quotations and citations omitted.) Cook v. Reising, 181 Ohio App.3d 546, 2009-Ohio-
1131, ¶ 24 (9th Dist.) Such a relationship “may be created either formally, by contract, or
informally.” Ligman v. Realty One Corp., 9th Dist. No. 23051, 2006-Ohio-5061, ¶ 9. The terms
of unambiguous contracts must be interpreted according to their plain meaning. Sarum Mgt.,
Inc. v. Alex N. Sill Co., 9th Dist. No. 23167, 2006-Ohio-5710, ¶ 8.
{¶16} The IRA Application Paterson admitted to signing contains the following
provisions:
8.03 Representations and Responsibilities:
(a) * * * By performing services under this Agreement [Equity Trust] [is] acting
as your agent. You acknowledge and agree that nothing in this Agreement shall
be construed as conferring fiduciary status upon us.
***
8.05 Investment of Amounts in the IRA:
***
(b) Custodian Acting in Passive Capacity Only. [Equity Trust] [is] acting solely
as a passive custodian to hold IRA assets and we have no discretion to direct any
investment in your IRA. Accordingly, we are not a fiduciary * * * with respect to
your IRA account.
The unambiguous terms of the application support the conclusion that no fiduciary relationship
existed between Paterson and Equity Trust. Further, this Court has refused to recognize the
existence of a fiduciary relationship between the custodian of a self-directed IRA and an investor
in similar circumstances. Tarquinio v. Equity Trust Co., 9th Dist. No. 06CA008913, 2007-Ohio-
3305, ¶ 10-16.
9
{¶17} Patterson argues on appeal that a genuine issue of material fact exists here
because Equity Trust acknowledged that it was serving as his agent, a position requiring it to
exercise reasonable care and diligence. He points to the above-quoted language of section
8.03(a) of his IRA application, in which Equity Trust referred to itself as his agent. That
argument, however, ignores the surrounding language in which Equity Trust expressly disavows
any status as a fiduciary. The contract unambiguously provides that Equity Trust was not a
fiduciary here. See Sarum Mgt., Inc. at ¶ 8. It does not support the argument that a fiduciary
relationship existed.
{¶18} Paterson also argues on appeal that, as a matter of public policy, Equity Trust
should not be permitted to disclaim its fiduciary duty as an agent by contract. The record reflects
that Paterson did not make this argument in the court below. As such, he cannot raise it for the
first time on appeal. Morgan v. Village of Silver Lake, 9th Dist. No. 25148, 2010-Ohio-3581, ¶
11.
{¶19} Because Paterson failed to demonstrate that any genuine issue of material fact
exists here with regard to whether Equity Trust owed him a fiduciary duty, the trial court did not
err by concluding that Equity Trust was entitled to summary judgment on the claim for breach of
a fiduciary duty. Paterson’s second assignment of error is overruled.
Assignment of Error Number Three
THE TRIAL COURT ERRED WHEN IT GRANTED SUMMARY JUDGMENT
FOR EQUITY TRUST COMPANY ON COUNT I, MR. PATERSON’S
BREACH OF CONTRACT CLAIM, BECAUSE WHETHER EQUITY TRUST
FORMED AN ADEQUATE “BELIEF” THAT THE DIRECTION OF
INVESTMENT FORM WAS “GENUINE” AS REQUIRED BY THE
APPLICATION AGREEMENT IS AN ISSUE OF MATERIAL FACT FOR THE
JURY.
10
{¶20} In his third assignment of error, Paterson argues that the trial court erred by
concluding that Equity Trust was entitled to summary judgment on his breach of contract claim.
Specifically, he argues that genuine issues remain as to whether Equity Trust disbursed funds
from his IRA in violation of their agreement. We disagree.
{¶21} Once again, we incorporate the standard of review and summary judgment law set
forth in Paterson’s first assignment of error. “Ratification has been defined as the approval by
act, word, or conduct of that which was improperly done.” AFCO Credit Corp. v. Brandywine
Ski Ctr., Inc., 81 Ohio App.3d 217, 221 (9th Dist.1992). A principal may ratify the unauthorized
acts of his agent, “and such ratification relates back to the time of performance of the acts and
binds the principal from that time.” Penn Traffic Co. v. AIU Ins. Co., 99 Ohio St.3d 227, 2003-
Ohio-3373, ¶ 16, quoting State v. Warner, 55 Ohio St.3d 31, 65 (1990). Even an unauthorized
signature may be ratified. Beneficial Mortg. Co. of Ohio v. Ludrosky, 9th Dist. No. 2311-M,
1994 WL 687204, *4 (Dec. 7, 1994). Ratification may be implied through conduct in the
absence of an express ratification. Campbell v. Hospitality Motor Inns, Inc., 24 Ohio St.3d 54,
57 (1986). Additionally, ratification may occur when a principal, having knowledge of his
agent’s acts, fails to repudiate them within a reasonable period of time. Id.{¶22} Paterson claimed that Equity Trust breached its contract with him by disbursing
the funds from his IRA on the basis of a forged signature. Equity Trust argued that it was
entitled to summary judgment because Paterson ratified Sadlak’s forgeries. In his deposition,
Paterson admitted that he agreed to open a self-directed IRA with Equity Trust for the purpose of
transferring funds to Williamston. He signed the account application, which Sadlak witnessed,
on January 29, 2007. Paterson testified that he wanted to invest his money in Williamston and
11
knew that the investment would be approximately $66,000. He also knew the investment had
occurred. The following exchanges took place during Paterson’s deposition:
Q: * * * [W]hen did you become aware that your IRA made an investment in the
Williamston property?
A: I believe [Sadlak] told me, and then I saw it on the * * * quarterly statement. I
think the first quarterly statement that came reflected that there was a $66,000
investment in the Williamston property.
***
Q: And when [Sadlak] told you it had been invested, did you raise any objection?
A: No.
Q: In fact, this is what you wanted; was it not?
A: Yes.
Q: And it was your intent to invest the $66,666.66 in the Williamston property, as
you referred to it, right?
A: That’s correct.
Paterson testified that he was aware Sadlak was sending forms to Equity Trust on his behalf.
Although Paterson testified that he did not sign the letters or direction of investment form that
Sadlak sent to Equity Trust, he could not recall if Sadlak told him he was sending the items on
Paterson’s behalf. Paterson stated that he only became dissatisfied with his investment when he
learned that it fell through.
{¶23} Paterson argues that he could not ratify the disbursement of his funds here
because he did not have full knowledge of the facts. Specifically, he argues that he did not know
Sadlak forged his signature and had he known Sadlak “was in fact a common criminal * * * he
would have instantly canceled the investment.” Paterson’s deposition testimony was not clear on
this point, however, as he said he knew Sadlak was sending forms to Equity Trust on his behalf
and just did not recall if Sadlak had told him he sent those items. More importantly, it is
12
irrelevant that Paterson did not know that Sadlak signed his name in order to accomplish the
investment. Paterson’s deposition testimony evidences the fact that he was fully aware of what
the investment would entail as well as the fact that the investment occurred. He specifically
testified that he wanted to invest $66,666.66 in Williamston and had no objection to the
investment when he learned that it had occurred. The fact that Paterson was unhappy with the
ultimate result of his investment has no bearing on the fact that he ratified Sadlak’s acts.
Paterson, therefore, did not set forth any evidence to demonstrate the existence of a genuine issue
of material fact here. Equity Trust was entitled to summary judgment on the basis of ratification.
Consequently, Paterson’s third assignment of error is overruled.
III
{¶24} Paterson’s assignments of error are overruled. The judgment of the Lorain
County Court of Common Pleas is affirmed.
Judgment affirmed.
There were reasonable grounds for this appeal.
We order that a special mandate issue out of this Court, directing the Court of Common
Pleas, County of Lorain, State of Ohio, to carry this judgment into execution. A certified copy of
this journal entry shall constitute the mandate, pursuant to App.R. 27.
Immediately upon the filing hereof, this document shall constitute the journal entry of
judgment, and it shall be file stamped by the Clerk of the Court of Appeals at which time the
period for review shall begin to run. App.R. 22(C). The Clerk of the Court of Appeals is
13
instructed to mail a notice of entry of this judgment to the parties and to make a notation of the
mailing in the docket, pursuant to App.R. 30.
Costs taxed to Appellants.
BETH WHITMORE
FOR THE COURT
DICKINSON, J.
CONCURS
CARR, J.
DISSENTS
APPEARANCES:
NANCY C. SCHUSTER, Attorney at Law, for Appellants.
KENNETH A. BRAVO and ISAAC J. EDDINGTON, Attorneys at Law, for Appellee.