Wednesday, April 5, 2017
Disciplinary Counsel v. Scott C. Smith, Case no. 2014-0197
Terraza 8 LLC et al. v. Franklin County Board of Revision et al., Case no. 2015-2063
Ohio Board of Tax Appeals
Nationwide Mutual Insurance Company v. Christine Lucarell, Case no. 2016-0585
Seventh District Court of Appeals (Mahoning County)
Cleveland Metropolitan Bar Association v. Edward J. Heben Jr., Case no. 2016-1495
Disciplinary Counsel v. Scott C. Smith, Case no. 2014-0197
The Office of Disciplinary Counsel charged Scott C. Smith of Pepper Pike, a former partner of the Weston Hurd law firm, with multiple violations of the rules governing Ohio lawyers based on allegations made in 2007 by the firm. Smith and another firm attorney provided services to nursing home clients.
The disciplinary counsel charged that Smith used unethical billing practices in five separate cases involving three nursing homes that were being sued for negligence by former patients. He allegedly billed for work performed by another attorney, and billed for more time than he actually spent on tasks and for work he never performed. He also allegedly billed multiple cases and clients for identical services on the same day.
The billing was for services between 2005 and 2007, and the disciplinary counsel filed charges in 2011 with what is now referred to as the Board of Professional Conduct. A three-member board panel conducted a three-day hearing in 2013, and a year later the panel recommended that the board suspend Smith from the practice of law indefinitely. Smith noted he voluntarily stopped practicing in 2007 after the allegations were made against him.
First Supreme Court Ruling
The board recommended an indefinite suspension to the Ohio Supreme Court, but Smith objected to the sanction, arguing he didn’t get a fair hearing from the panel.
In his 2014 objections to the board’s report, Smith maintained the board relied on billing guidelines of the nursing homes to determine if he followed their system for payment for services. Smith explained that because these were negligence suits against the homes, the businesses weren’t directly involved in the cases, but rather it was the insurance companies and the third-party administrators hired by the nursing homes that were handling the billing. He argued those companies wanted him to provide billing codes and to provide brief or misleading “narratives” about the work he did, and that was done intentionally and with the consent of the homes.
Panel Thwarted Access to Key Data, Smith Asserts
Smith argued that Weston Hurd, the nursing homes and the insurance providers withheld access to databases and emails that would prove he was following agreed-upon procedures. Without the information, he couldn’t defend his position, he asserted.
In 2015, the Court issued a per curiam opinion in the disciplinary case expressing its “alarm” about the absence of documents and testimony regarding the information in the databases, which it believed could either “confirm or discredit Smith’s claims.” The Court remanded the case to the professional conduct board for further proceedings to address the access to the database information Smith requested.
Second Hearing Leads to Similar Outcome
The panel conducted a second hearing in June 2016 after allowing Smith to gather the information he requested from the law firm and the companies. The panel determined that none of the new information changed the outcome. It again concluded Smith violated several ethics rules, and recommended an indefinite suspension.
The board agreed and presents the recommendation to the Court. Smith objects to the sanction and argues the case should be dismissed because of continued failure of the board to ensure the companies turned over the data Smith was entitled to receive.
The board reports to the Court that it issued subpoenas to Weston Hurd and all the companies that Smith asked to produce information. The board reports the panel, after considering the information produced at the second hearing, found nothing to support Smith’s contention that the clients approved of the vague and repetitive narratives that were not meant to be “read by a human being” but were only to reflect that the work was consistent with a pre-determined budget.
The board found Smith acted with a selfish and dishonest motive as a result of submitting fraudulent time entries, and he did financial harm to both the clients and the law firm. It noted that Weston Hurd has paid about $350,000 in restitution to the clients. The board noted that ongoing civil lawsuit proceedings were occurring among Smith, his former firm, and clients about the financial damages, and it concluded that if Smith applies for reinstatement, he should prove he paid all restitution ordered against him that results from the civil cases.
Smith Given Requested Access, Disciplinary Counsel Maintains
The disciplinary counsel supports the board’s findings and argues that Smith had the opportunity to conduct all the discovery he believed he was previously denied, and yet no new evidence supporting Smith’s claims have come to light. The disciplinary counsel concludes that no evidence indicates the clients directed him to include misleading narratives in the bills he submitted.
In addition to not uncovering any new evidence from the documents he requested, the disciplinary counsel argues that Smith also failed to call any witnesses to support his position, particularly the nursing home attorney whom Smith claimed directed to submit misleading bills.
- Dan Trevas
Representing the Office of Disciplinary Counsel: Stacy Beckman, 614.461.0256
Representing Scott Clifford Smith: Kenneth Donchatz, 614.364.0880
- Does the “fee simple” standard in R.C. 5713.03 require an inquiry into whether a lease reflects market rent at the time of a sale?
- Does the Ohio Administrative Code require that certain factors (market rent, the leased fee, and leasehold value) be considered in determining fee simple value under R.C. 5713.03?
On Feb. 8, 2013, P&P Taylorsville Hilliard New Albany LLC sold a 54,621-square-foot fitness facility in Hilliard to Terraza 8 LLC. For tax year 2013, the Franklin County auditor valued the property at $4.85 million.
The Hilliard City School District Board of Education filed a complaint, asking the Franklin County Board of Revision to instead value the property based on the February 2013 sale price of $15.4 million. The board of revision agreed in early 2015 that the $15.4 million sale price was the appropriate value for the property.
Terraza appealed to the Ohio Board of Tax Appeals (BTA), which upheld the board of revision’s determination for tax year 2013. Terraza filed an appeal of the ruling to the Ohio Supreme Court, which must review cases from the BTA.
Property Owner Believes Value Is Lower Because of Lease
Terraza notes that the Hilliard property was subject to a long-term lease when the company bought it in February 2013. The lease began on April 1, 2007. At the BTA hearing, appraiser Patricia Costello testified on behalf of Terraza and provided a property appraisal that differed from the county auditor’s because it took the lease and several other criteria into account. Costello valued the “fee simple interest” in the property at $7.06 million.
The property owner contends that R.C. 5713.03 mandates that the county auditor calculate the fee simple interest in the property and states that the auditor may, but doesn’t have to, use a property sale to determine that value. Although an earlier version of the law didn’t provide for the fee simple standard and required, rather than allowed, the auditor to use a property sale price in deciding the value, that version doesn’t apply in this case, Terraza states.
Terraza also argues in its brief to the Court that the Ohio Administrative Code requires the auditor to “give weight to current economic rent under the income approach.” Costello considered this and other accounting factors in her appraisal. The fee simple value of the property is the correct standard to use but isn’t accurately reflected by the February 2013 property sale alone, Terraza maintains, concluding that the fee simple value standard ensures that all property in the state is valued uniformly.
Hilliard School Board Maintains Sale Price Best Reflects Property Value
The school board explains that R.C. 5713.03 was amended in 2012 to require the auditor to determine the “true value of the fee simple estate, as if unencumbered” of each property. As part of that valuation, the statute originally said that an arm’s length sale of the property must be considered, but it was amended to allow, but not require, the auditor to consider such a sale, the school board notes. A bill enacted later in 2012 added additional language about the fee simple estate and also repealed the effective date provision for R.C. 5713.03 in the earlier legislation. As a result, the school board maintains that the R.C. 5713.03 amendments don’t apply to this case, but instead would apply beginning with tax year 2014.
But even if the R.C. 5713.03 amendments apply to tax year 2013, the school board asserts that the Ohio Supreme Court has repeatedly ruled that the price paid in an arm’s length sale of a property is the best evidence of a property’s value. Although Terraza claims that the property’s sale price doesn’t reflect the property’s value in this case because of the lease, the school board disagrees. The distinction between “fee simple” and “leased fee” is useful for appraisers, but isn’t one recognized by law, the school board states, citing Ohio Supreme Court decisions. When the General Assembly added the fee simple unencumbered language to R.C. 5713.03, it didn’t negate the usefulness of a recent sale in determining a property’s value, the school board argues.
The board notes that it presented documents to support the sale price and, at that point, the burden of proof shifted to Terraza to refute that valuation. Terraza’s report and testimony from appraiser Costello didn’t dispute that the sale was recent, at arm’s length, or voluntary, so Terraza failed to provide the proper evidence to dispute the $15.4 million value, the school board concludes.
Tax Officials Can’t Participate in Oral Arguments
The Franklin County auditor, the Franklin County Board of Revision, and the Ohio tax commissioner are parties to this case, but didn’t submit briefs. Supreme Court rules state that a party that fails to file a merit brief waives oral argument and cannot argue the case before the Court.
- Kathleen Maloney
Representing Terraza 8 LLC: Todd Sleggs, 216.771.8990
Representing Hilliard City School District Board of Education: Mark Gillis, 614.228.5822
Nationwide Mutual Insurance Company v. Christine Lucarell, Case no. 2016-0585
Seventh District Court of Appeals (Mahoning County)
- If Ohio’s general rule is that punitive damages aren’t awarded for a breach of contract claim, can punitive damages be paid if the breach is accomplished through a connected tort claim involving fraud, malice, or oppression?
- Can the defense of “prevention of performance” — typically used to excuse compliance with a contract — be a defense for noncompliance with a contract’s release agreement?
After working for several years for insurance agents in Mahoning and Trumbull counties, Christine Lucarell signed a contract to join Nationwide Mutual Insurance Co.’s Agency Executive Program (AE program) in 2005. The three-year AE program was designed to establish new, exclusive Nationwide agents as independent contractors. Lucarell received a $260,000 loan from Nationwide’s affiliated Nationwide Bank to help her start her business. Under the AE program, Lucarell sold Nationwide property and casualty insurance and agreed to meet certain minimum sales requirements to complete the program. If she met certain requirements, Nationwide would waive some or all of the loan.
The program required Lucarell generate $1.2 million in direct written premium (DWP) by the end of the 36 months, and Nationwide set monthly minimum sales requirements. If an agent fell behind on the production requirements, Nationwide could place the agent on probation, and could fire agents who continued to fall behind while on probation.
Nationwide sales managers recruited agents to join the AE program, and each manager was required to hire a specific number of agents. Failure to meet the hiring objectives could adversely impact the salaries of the sales managers. Sales managers used “pro formas” and business plans that projected future agency profits to encourage participation in the program.
Lucarell Starts Strong, But Faces Problems
Lucarell completed the loan application and opened her agency. She later learned that Nationwide employees made changes without her knowledge to her loan application. In her first year, Lucarell earned about $400,000 in DWP, surpassing her minimum sales requirements. As time passed she began having trouble meeting the requirements. Nationwide offered to modify the terms.
In early 2007, Nationwide and Lucarell entered a memorandum of understanding, which contained a release of all legal claims against Nationwide in exchange for an additional $50,000 and assistance in revising her business plan. Lucarell claimed that Nationwide told her if she didn’t sign, she would be fired and the loan would be due in full. She claimed that her sales manager brought the agreement to her home the day after she had surgery when she was heavily medicated, and that she was under duress when she agreed.
Lucarell operated as an agent under the new agreement for 18 months, but struggled to meet the new requirements. Nationwide claims it gave Lucarell the option of exiting the program and having the company pay off her loan, or she could enter a new deal called the Modified AE agreement. The company indicated the new agreement extended the time Lucarell had to meet production requirements, extended the time she would have to pay off the loan, and provided additional cash to the agency. Lucarell would again have to release all legal claims she might have against the company.
Two months after entering the Modified AE agreement, the company claims Lucarell started spending lavishly on herself, and stopped paying office rent, her loan, and payroll taxes. Lucarell claimed she entered the Modified AE with the promise from Nationwide that she could merge her agency with two existing ones operated by older agents seeking to retire and count their DWP toward her goals. She claims Nationwide didn’t keep the merger promise.
Lucarell charges that under the Modified AE Nationwide changed the rules for calculating her DWP goals, and began withholding commissions and financing she needed to operate the agency. She was placed on probation in April 2009 and left the program in July 2009. She filed a lawsuit against Nationwide in 2010, claiming that Nationwide breached its agreements, and she sued for fraud and invasion of privacy.
Trial Court Delivers Split Decision
Lucarell’s breach of contract and fraud claims were based on three contracts she signed. Her invasion of privacy claim stems from the alleged misappropriation of her name because Nationwide sent out five communications stating to customers that Lucarell was still their agent after she had left the program.
Nationwide filed a counterclaim for failure to pay the loan, which prompted Lucarell to add claims of retaliation and constructive discharge, arguing that Nationwide made it impossible to operate successfully and that her resignation was essentially forced. The jury awarded Lucarell $42.8 million of which $22 million was for the constructive discharge claim. The jury awarded $11.5 million for retaliation, $5.1 million for invasion of privacy, and $4.2 million based on the contract claims and lost profits.
The jury rejected Nationwide’s counterclaims. The trial court granted Nationwide a directed verdict on Lucarell’s fraud claims, finding that while the sales requirements may have been made more challenging, she failed to prove that Nationwide misrepresented anything to her. The trial court also accepted Nationwide’s challenges to the jury awards and reduced the final judgment to $14.2 million, of which $10.5 million were for punitive damages.
Both Sides Appeal Decision
Nationwide and Lucarell each appealed to the Seventh District Court of Appeals, with Nationwide seeking to have the verdict overturned and Lucarell seeking a chance to pursue her fraud claim and recoup more of the damages awarded by the jury.
The Seventh District ruled in favor of Nationwide on the constructive discharge and retaliation claims, and found that the jury exceeded the punitive damages award allowed for invasion of privacy. The appellate court affirmed the breach of contract claims, and adjusted Lucarell’s award to $2.38 million plus attorney fees and prejudgment interest.
The Seventh District also ruled the trial court incorrectly granted a directed verdict to Nationwide on the fraud claim, and found that Lucarell presented enough evidence to establish the question of fraud should have been presented to the jury. It also found that the trial court should have allowed the jury to consider claims for punitive damages on Lucarell’s breach of contract claims.
Nationwide appealed the Seventh District’s decision, and the Supreme Court agreed to hear the case.
No Proof of Breach of Contract, Nationwide Asserts
Among the concerns Nationwide raises is that the trial court should never have allowed the jury to consider the breach of contract claims because Lucarell didn’t present a valid reason for breaking the agreement. And even if it the jury found Nationwide breached a contract, Ohio laws don’t allow punitive damages for breach of contract, the company argues. It warns that permitting it would run contrary to Ohio’s “tort reform” laws, which caps punitive damages.
Nationwide notes the trial court ruled that Lucarell failed to prove the company breached any term written in the contract. However, the judge allowed the jury to consider if Nationwide breached an element of all contracts known as the “implied covenant of good faith and fair dealing.” The trial court found that if the jury believed Nationwide made fraudulent misrepresentations to Lucarell, it could find the company breached the contract, which is what the jury did.
Nationwide maintains that it followed the terms of its contracts, and citing the Ohio Supreme Court’s 1996 Ed Schory & Sons, Inc. v. Soc. Natl. Bank decision, argues that the company can’t be found to have breached an implied duty if it followed the written contract terms.
The company also asserts that Lucarell was barred from bringing breach of contract claims because she signed two releases when updating her contracts with Nationwide, and in both releases, she agreed not to sue. The trial court allowed the lawsuits to go forward because Lucarell claimed that Nationwide broke its promises, which made the release agreements invalid. She claimed that forcing her to sign an agreement under duress and the company’s “prevention of performance” by withholding commissions and financing invalidated the release agreements.
Nationwide argues that “prevention of performance” isn’t a valid defense to a release of claims against a company. It also argues that the trial court gave the jury the wrong standard of proof for duress, which the Seventh District agreed was incorrect. However, the Seventh District wrote that the wrong standard didn’t matter because Nationwide didn’t get clarification from the jury as to why it sided with Lucarell. It didn’t ask the jury through an interrogatory if they believed it was because of prevention of performance or duress. The Seventh District considered prevention of performance a valid defense, and without any further information in the record, let the jury’s decision stand. Nationwide asks the Supreme Court to either rule in its favor or send the matter back to trial court for reconsideration.
Punitive Damages Not Permitted, Company Claims
Nationwide cites the Court’s holding in the 1922 Ketcham v. Miller decision that a party can’t obtain punitive damages on a breach of contract claim. The company argues the Court and several appellate courts have reaffirmed the Ketcham ruling many times in the following years.
The company asserts that even if there were a tort element in part of the breach of contract claim, such as Lucarell’s claim of fraud, punitive damages are only available if the jury finds the company committed the tort, independently of the breach. Nationwide cites the state’s 2004 tort reform legislation, which is now R.C. 2315.21(A)(1), that indicates punitive damages can only be awarded in a tort action, and specifically excludes breach of contract.
Nationwide maintains that R.C. 2315.21 caps punitive damages for tort claims. If the Court were to allow punitive damages for a breach of contract claim, there would be no caps on the damages, and that would be inconsistent with what the General Assembly had intended, the company concludes.
Exception Exists to Punitive Damages Rule, Lucarell Asserts
Lucarell acknowledges that while the general rule is to not award punitive damages for breach of contract, there is an exception to the rule that the Court has followed for more than 70 years. Citing the Court’s 1946 Saberton v. Greenwald decision, Lucarell maintains punitive damages are permitted “where the breach of contract is accompanied by a connected, but independent tort involving fraud, malice or oppression.” She argues Ohio courts have been citing and relying on the decision.
Lucarell maintains that Nationwide’s actions fall within the definition of malice and fraud, arguing that financial documents were altered, falsified, and missing. Those acts led to her failure to maintain sales requirements, she argues. She also asserts that Nationwide’s argument against punitive damages is premature because a jury has yet to decide the matter.
Based on the trial court’s decisions, the jury hasn’t ruled on Lucarell’s fraud claim, which is independent of the breach of contract claim. And the jury was blocked from deciding if it wanted to award punitive damages for the breach of contract claim, she notes. If the Seventh District’s decision were to stand, the case would be remanded to the trial court and the jury would deliberate on the issues. Then Nationwide can learn if the punitive damages the jury awards, if any, are because of the breach or the fraud, she explains. If it’s because of the breach, then Nationwide can press its argument that the awards are improper, she concludes.
Lucarell also counters that the arguments regarding tort reform are overblown and that the General Assembly was aware of the exception to the rule that allows for punitive damages in some breach of contract cases. She argues Nationwide is asking the Court to do what the legislature hasn’t by extending the exclusion of punitive damages to contract cases.
Lucarell also argues that a release is itself a contract, and any contract can be disregarded if one of the parties commits fraud. She notes that Nationwide in the trial court understood that releases act like contracts and asked the jury if it believed that Lucarell released Nationwide of all claims when she signed the documents or if she reserved the right to sue in some circumstances. Through two interrogatories, the jury answered that it didn’t believe Lucarell released the company of all claims. Similarly because a release is a contract, she argues that prevention of performance does apply as it would to any contract dispute.
An amicus curiae brief supporting Nationwide’s position has been submitted by jointly by the Ohio Insurance Institute, the Ohio Chamber of Commerce, the Ohio Alliance for Civil Justice, the Ohio Manufacturers’ Association, and the National Association of Mutual Insurance Companies.
- Dan Trevas
Representing Nationwide Mutual Insurance Co.: Thomas Warren, 216.861.7528
Representing Christine Lucarell: Randy Hart, 216.978.9150
Cleveland Metropolitan Bar Association v. Edward J. Heben Jr., Case no. 2016-1495
The Board of Professional Conduct recommends to the Ohio Supreme Court that Cleveland attorney Edward J. Heben Jr. be suspended from practicing law for one year, with six months stayed, because he disclosed information in an affidavit about his representation of a client without the client’s consent.
The board dismissed several additional charges of attorney misconduct submitted in November 2015 by the Cleveland Metropolitan Bar Association after concluding that the evidence didn’t support those allegations.
Client Disputes Bill in Divorce Matter
Heben was hired in April 2008 to represent Jennifer Cecchini in her divorce. The matter, which involved three children and substantial assets, stalled in a Stark County court for seven years. Cecchini stopped using Heben’s services in 2008 and was represented by five different lawyers over the years.
Cecchini hired Heben for a second time in September 2013 to handle a real estate issue in the divorce. As part of an arbitration agreement, one of the divorcing couple’s properties was sold at auction. Cecchini disputed how that auction was handled and refused to transfer the real estate title. Heben began work on the matter in preparation for a hearing.
Cecchini never signed Heben’s fee agreement, fired him after 16 days, and disputed the bill for his work. While the bar association concluded that Heben did all the work documented in his billing statement, it charged that Heben’s fee was excessive because Cecchini said Heben exceeded the scope of what she authorized. The panel assigned to review the case for the board dismissed the charge, however, after determining that Heben’s work was much more substantial than the bar association and Cecchini indicated.
Lawyer Discloses Alleged Illegal Activity in Court Filing
After Cecchini fired Heben, he filed a motion to withdraw as her lawyer. He attached an affidavit to the request in which he disclosed confidential information Cecchini had told him and stated that Cecchini fired him as retaliation for his advice about actions she had taken that he considered illegal.
The panel determined that Heben’s affidavit violated an ethics rule that prohibits lawyers from revealing information related to their representation of a client without the client’s consent. The panel took issue with Heben’s approach – using an affidavit to share Cecchini’s alleged illegal conduct with the court – and noted that none of the ethical duties lawyers have to report certain activities by clients applied in the circumstances of this case.
Charges Dismissed in Foreclosure Case
The panel dismissed several other rule violations charged by the bar association involving Heben’s representation in another client’s foreclosure case. Based on the evidence, Heben didn’t charge an excessive fee for his work, he didn’t misrepresent what he could accomplish in the case, and he kept the client informed about the matter during the few days he handled the case, the panel concluded.
Lawyer Believes Suggested Sanction Is Too Harsh
Heben objects to the board’s recommended sanction of a six-month actual suspension. He states in his brief that he believed he was required by local court rules to provide “a complete and detailed explanation of his reasons for withdrawing from [Cecchini’s] case.” He notes that he obtained research from the Cleveland Law Library Association for guidance on his ethical obligation related to Cecchini’s alleged fraudulent actions and, based on that information, thought his affidavit was proper.
As the board determined, he acknowledges that he should have disclosed the possibly fraudulent conduct only with enough detail to offset the possible damage to Cecchini’s spouse in the divorce and should have made that disclosure to the court in a way that didn’t make the information public, as happened when he filed the affidavit. (The court removed the affidavit from the record at Cecchini’s request after determining that the contents weren’t relevant or appropriate.) He contends that the evidence doesn’t show he was being vengeful, but instead indicates that he “made a good faith effort to comply with the local rule and his ethical obligations.”
The board’s recommended sanction is based on a 2004 disciplinary case in which the attorney didn’t keep client confidences but also was found to have committed substantial additional misconduct. But Heben notes he has been found to have committed only one rule violation. Pointing to his 41 years of practice with no prior discipline, he argues the suggested six-month actual suspension is too severe for this single rule violation and asks the Court for a sanction with no actual suspension time.
Cleveland Association Argues Suspension Is Warranted
The bar association counters that Heben is only now acknowledging his misconduct when filing the affidavit and adds that he continues to blame the law library for the breach of confidentiality he owed to Cecchini as her lawyer. The simplest inquiry into the rule pertaining to client confidences – which is easily accessed on the Supreme Court’s web site – would’ve made it clear to Heben that his affidavit as submitted was unethical, the bar association asserts. The document he filed contained information that harmed Cecchini in her ongoing divorce litigation, the association stresses, adding that Heben continues to inappropriately disparage his former client in his objections.
The bar association also rejects Heben’s position that he acted in good faith when crafting the affidavit. A veteran attorney’s failure to review attorney conduct rules doesn’t demonstrate good faith, the bar association argues. Heben’s supposed ignorance of his ethical responsibilities doesn’t excuse his misconduct, and he knew disclosing such client information in a public document would be harmful, the bar association maintains. The association agrees with the board that Heben had a vengeful purpose.
Contending that the board cited the 2004 disciplinary case because of that attorney’s similar selfish motivation, the bar association believes the recommended one-year suspension with six months stayed is appropriate.
- Kathleen Maloney
Representing Edward Joseph Heben Jr.: George Jonson, 513.241.4722
Representing Cleveland Metropolitan Bar Association: Heather Zirke, 216.696.3525
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