Tuesday, July 9, 2019
Hazel M. Willacy v. City of Cleveland Board of Income Tax Review and Nassim M. Lynch, administrator, Central Collection Agency, Case no. 2018-0794
Tenth District Court of Appeals (Franklin County)
Columbus Bituminous Concrete Corporation et al. v. Harrison Township Board of Zoning Appeals et al., Case no. 2018-1008
Fourth District Court of Appeals (Pickaway County)
In the Matter of N.M.P., Case no. 2018-1842
Eleventh District Court of Appeals (Portage County)
Irene Danopulos v. American Trading II LLC, Case no. 2018-1157
First District Court of Appeals (Hamilton County)
Did City Improperly Tax Income That Nonresident Earned by Exercising Stock Options?
Hazel M. Willacy v. City of Cleveland Board of Income Tax Review and Nassim M. Lynch, administrator, Central Collection Agency, Case no. 2018-0794
Tenth District Court of Appeals (Franklin County)
ISSUES:
- Do certain tax provisions in Cleveland’s Codified Ordinances and Cleveland’s Tax Rules and Regulations violate due process, as guaranteed in the U.S. and Ohio constitutions, because the provisions make nonresident retirees pay taxes on income received during tax years when they were neither employed nor physically present in Cleveland?
- Does the implied condition that tax statutes cannot have extraterritorial effect preclude Cleveland from taxing the exercise of stock options by a nonresident retiree who was granted the stock options by a former employer?
- Does the existence and ready availability of certain models to determine the value of stock options disprove the need for a taxing authority to wait until stock options are exercised to calculate the value of that compensation?
BACKGROUND:
The Sherwin-Williams Company employed attorney Hazel Willacy in Cleveland from August 1980 until her retirement in spring 2009. During her 29-year tenure, the company offered Willacy options to purchase shares of its stock, setting specific prices at which she could exercise the options. Some of the stock options were granted to her before 2007.
In October 2007, the company awarded her additional options to purchase 2,715 shares of common stock in the company at an exercise price of $63.44 per share. At the time, Sherwin-Williams’ annual report listed the average value of option rights that year as $16.28 per share. The terms dictated that Willacy couldn’t exercise these options for one year and that the options expired 10 years after the grant date.
Shortly before her 2009 retirement, Willacy changed her state of residence and permanent home from Ohio to Florida.
Former Employee Receives Refunds of City Taxes in Some Years, but Not in Others
Between March 2009 and December 2013, Willacy exercised some of her pre-2007 stock options. Sherwin-Williams withheld city income taxes from the amounts Willacy made by exercising these options. In 2010, she requested a refund of the income taxes from the Central Collection Agency (CCA) for the city of Cleveland. She stated that she was entitled to a refund because she didn’t live, work, or perform services in Cleveland or Ohio that year and became a Florida resident in April 2009. The CCA issued a refund. Willacy again requested a refund in 2011 and submitted a letter from Sherwin-Williams verifying that the income wasn’t from earnings, but instead resulted from stock options. The CCA refunded the city income taxes she had paid.
In January 2014, Willacy exercised part of the stock options awarded to her in October 2007. She purchased 315 shares of the company’s stock at the exercise price of $63.44 and simultaneously sold them at the market price of $192.646 per share, generating $40,699.89 in proceeds. Cleveland assessed its 2 percent income tax, or $814, on the amount.
Willacy exercised more of her 2007 stock options in January 2015. She purchased 1,800 shares of the stock at the $63.44 exercise price and sold them at the market price of $275 per share, generating $377,766. The city’s 2 percent income tax on that amount was $7,555.32.
Willacy requested refunds of the Cleveland income taxes withheld in 2014 and 2015 on those sales. In July 2015, CCA’s auditor denied her 2014 refund request, stating that stock option income is taxable at the time the options are exercised, regardless of where she lived. In the denial of Willacy’s 2015 refund request, CCA’s auditor noted, “Stock options, when exercised, are fully taxable to the former employment city.”
Former Employees Appeals Denial of Refunds
Willacy appealed these denials to CCA’s tax administrator, Nassim Lynch, and in part alleged that taxation of the income violated her due process rights under the state and U.S. constitutions because the income wasn’t earned in Cleveland. However, Lynch upheld the denials. He indicated that stock options are “qualifying wages” according to Cleveland’s tax laws, adding that the administrative agency doesn’t have the authority to rule on constitutional claims.
Willacy appealed, and the Cleveland Board of Tax Review affirmed Lynch’s decision in February 2017, as did the Ohio Board of Tax Appeals in April 2018. She filed an appeal of the agency’s decision in the Tenth District Court of Appeals. She then petitioned to transfer the jurisdiction over the case from the Tenth District to the Ohio Supreme Court, and the Supreme Court granted the request in September 2018.
Is City Permitted to Tax Nonresident for Exercise of Stock Options?
Willacy argues that due process prohibits a state from engaging in “extraterritorial taxation.” Cleveland is classifying income received by nonresidents who no longer work in the city as if it were income received by someone who resides or works in the city, Willacy maintains. She contends that Cleveland’s ordinances that define compensation generated from exercising stock options as qualifying wages improperly ignore the time element as a factor for deciding whether the city has jurisdiction to levy taxes on these proceeds.
A taxing authority must have jurisdiction over the person as well as jurisdiction over either the object or the activity being taxed, Willacy argues. Citing the Ohio Supreme Court’s 2015 decisions in two cases involving NFL players – Hillenmeyer v. Cleveland Board of Review and Saturday v. Cleveland Board of Review, Willacy states that only income received as compensation for work done in that city during that tax year can be taxed by the city. She notes, however, that she wasn’t physically present in Cleveland during tax years 2014 and 2015.
Cleveland maintains, though, that the ability to tax nonresident income depends on where the wages were earned. While Willacy received the income after she no longer worked or lived in Cleveland, the city argues that the income was earned while she was employed in Cleveland. The city also states that Hillenmeyer and Saturday don’t apply to this case because they dealt with the apportionment of income when a taxpayer works in more than one taxing jurisdiction and Willacy worked in only one city.
The minimum contact needed to permit Cleveland to tax Willacy on the stock-option income isn’t broken unless the income was earned in the course of activities unrelated to the state, but Willacy earned this income for work done in Cleveland, the city contends. It concludes that it imposed no extraterritorial taxation on Willacy that violated her due process rights.
Do Stock-Option Proceeds Escape Taxation as Intangible Income?
Willacy notes the CCA’s reversal of its position on taxing stock options between the 2010, 2011, and 2012 tax years and the 2014 and 2015 tax years. She views the reversal as unlawful and unreasonable.
She also argues that the revenue from her stock options is exempt from taxation under Cleveland’s ordinances because it was a gain or revenue from “intangible property.” She contests the tax administrator’s position that the date the options are granted determine jurisdiction for taxation, while the date the options are exercised determine the value to tax.
But the city states that Ohio and federal law both provide that employee stock options are taxed when exercised, not when granted. Cleveland also rejects Willacy’s view that the exercise of employee stock options is intangible income or income from intangible property, citing three state appellate court decisions from the mid-1990s. The city maintains that an employee can’t evade municipal taxation by deferring compensation to a later year when the person becomes a nonresident and no longer works in the taxing jurisdiction.
Are Laws Requiring Taxation When Stock Options Are Exercised Outdated?
Willacy points to the current wide availability of various algorithms to value stock options. She disputes Cleveland’s argument that it must wait until stock options are exercised before it can know the value of the options. Sherwin-Williams published the value of her 2007 options in its annual report as $16.28, she notes, maintaining that the city had no reason to delay taxing her until later because the value of the stock options was known in 2007. When the reason for a legal rule ceases to exist, the law must cease, she explains, so Cleveland’s rationale for taxing the stock options when exercised in 2014 and 2015 is unreasonable because it’s no longer necessary to wait to determine the stock values.
The city counters that, by state law, it and other municipalities can tax only income included in Box 5 of a W-2 form. Willacy’s stock-option income wasn’t reported until 2014 and 2015 when she exercised those options and Sherwin-Williams reported it on her W-2s. The city maintains that the values determined by pricing model algorithms are no replacement for the actual value of stock options that can be pinpointed when they’re exercised.
- Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing Hazel M. Willacy: Aubrey Barrington Willacy, 510.569.6114
Representing City of Cleveland Board of Income Tax Review and Nassim M. Lynch, administrator, Central Collection Agency from the City of Cleveland Department of Law: Linda Bickerstaff, 216.664.4406
Can Township Deny Sand and Gravel Mining Permit Based on General Welfare Concerns?
Columbus Bituminous Concrete Corporation et al. v. Harrison Township Board of Zoning Appeals et al., Case no. 2018-1008
Fourth District Court of Appeals (Pickaway County)
ISSUES:
- Is a township’s jurisdiction to regulate surface mining activities strictly limited to matters of public health and safety?
- Does R.C. 519.141 permit a township zoning board to deny surface mining as a conditional use based on concerns related to the general welfare of the township?
BACKGROUND:
Columbus Bituminous Concrete Corp. (CBCC) and Shelly Materials applied for a conditional use permit in 2016 in which Shelly would operate a surface sand and gravel mine on 179 acres CBCC owned in Pickaway County’s Harrison Township. The property is zoned “general business district” and the township’s zoning code allows mining as a conditional use in the district. The property is vacant agricultural land bordered by vacant property to the north, owned by the city of Columbus, and on the east by a concrete batch plant. To the south is vacant agricultural property owned by Berger Health System. To the west is U.S. Route 23.
At CBCC’s request, the Pickaway County engineer approved a plan to allow the mining company to enter and leave the property through Weigand Road, a two-lane street that intersects with U.S. 23. The company agreed to widen Weigand near the mine entrance, and projected that, on average, 180 trucks a day would travel the road. The company also agreed to improve the intersection with U.S. 23 to facilitate the entrance and departure of trucks from the highway onto the road.
The Harrison Township Board of Zoning Appeals conducted a hearing on the permit in which several township residents objected to the company’s proposal. A Berger Health representative testified the mine conflicted with the township’s North Gate Alliance Strategic Land Use Plan and was at odds with its own future plans to develop its land south of the CBCC property. The township’s economic development director testified the mine would disrupt the North Gate land use plan, which seeks to develop mostly residential property east of U.S. 23 while keeping the township lands to the west of the highway available for mining. The zoning board rejected CBCC’s plan, finding the company wasn’t able to meet all the requirements required by the township.
Company Appeals Zoning Board Decision
CBCC appealed to the Pickaway County Common Pleas Court, which ruled that under R.C. 519.141(A) the board of zoning appeals could require CBCC to meet all of the township’s general standards that apply to all conditional uses for property in the area, and that the record contained “substantial, reliable, and probative evidence” that three sections of the zoning proposal weren’t met. The plan failed because the use wasn’t harmonious and appropriate to the existing or intended character of the area; that it could cause potential complications through water overflow and dust; and the increased traffic could disrupt plans for new access road to U.S. 23 envisioned by township planners. The court also noted that while CBCC proposed natural buffers around three sides of the property to mitigate dust and noise and to obscure the view of the mining activities, it didn’t plan to buffer the area facing Berger Health’s property to the south.
CBCC appealed the decision to the Fourth District Court of Appeals, which affirmed the trial court’s decision. The company appealed to the Ohio Supreme Court, which agreed to hear the case.
Township Overstepped Its Authority, Company Argues
CBCC explains the Ohio General Assembly has developed a comprehensive scheme through Chapters 5 and 15 of the Ohio Revised Code to permit and regulate surface mining in townships. Chapter 15 generally regulates mining and ensures mines comply with several state and federal regulations. R.C. Chapter 5 establishes the power of Ohio townships. In 2004, state lawmakers expanded the powers of townships and counties to regulate certain land uses “in the interest of public health, safety, convenience, comfort, prosperity, and general welfare.” While general land power expanded for townships, authority related to overseeing mining were limited. R.C. 519.02(A) restricted a township’s right to regulate surface mining “only in the interest of public health or safety,” the company notes.
Lawmakers also allowed townships to impose additional health and safety conditions on mining operations that aren’t regulated by or in conflict with regulations of any other federal, state, or local agencies. The company maintains that the General Assembly restricted the rights of townships to eight “specified measures” that could be added as conditions when issuing a conditional zoning certificate through R.C. 519.141.
The company argues the township zoning board overstepped its authority by denying the permit based on “general welfare” concerns rather than health and safety reasons. CBCC maintains that R.C. 519.14 and R.C. 519.141 limit the conditions a township zoning board can place on a mining permit to issues that are “reasonably related” to public health and safety. The rejection of the permit — under the claim that mining was inconsistent with the land use plan, increased traffic on a road, and potentially created dust and noise problems — are “general welfare” issues, which the township isn’t authorized to use as a basis for denying a permit, the company asserts.
CBCC argues the Fifth District Court of Appeals addressed the exact issue in its 2009 Highlanders Enterprise, LLC v. Chester Township Board of Zoning Appeals decision, in which Chester Township in Morrow County denied a company a conditional-use mining permit based on the general welfare concerns of traffic, dust, and noise. The Fifth District maintained that state law empowers townships to regulate surface mining “only in the interest of public health and safety.”
Compliance with General Welfare Standards Allowed, Township Maintains
Harrison Township argues that CBCC is attempting to “twist the language” of R.C. 519.141 to limit the authority of the township to regulate mining, and that it has the right to regulate both general welfare and health and safety matters. It also maintains that CBCC conveniently omits from its arguments that the township cited three reasons for the permit denial based on health and safety reasons.
The township notes that R.C. 519.141 can require a mining operation to comply with any general standards contained in a zoning resolution that applies to all conditional uses. When read together with R.C. 519.14, “one can see the legislature has specifically designated power to townships through zoning to regulate not only under public health and safety when considering mining activities, but also for the general welfare of the residents done through the avenue of a conditional use permit,” the township’s brief states.
The township also argues that while there are some “general welfare” reasons for its permit denial, others relate to health and safety. The township indicates that some homes are located a few hundred feet from the proposed site and that rural township residents chose to live there for their “health and safety” instead of in an industrial, or more congested part, of Ohio. While widening Weigand Road near the plant entrance would improve the its use for the mining company, the road is the primary means of travel for the rural residents to the highway, and the residents would be severely impacted by the heavy truck congestion on the small two-lane road. Additionally, the township maintains its comprehensive land use plan considered the public health and safety of the residents and the plan to “unite” its development with other area communities.
Health System Supports Zoning Board Ruling
Berger Health System also filed a brief opposing CBCC’s argument that the law limits the township’s zoning authority to matters of public health and safety. The health care facilities operator noted the zoning resolution provided the condition that the development “will not substantially alter the character of the vicinity or unduly interfere with or adversely impact the use of adjacent lots.”
Berger argues it has long made known its plans to use the property for a health care center and that the board heard evidence that the mine would directly impact the neighborhood’s capacity for future development. Berger maintains the CBCC’s proposal would effectively prevent Berger from constructing a health care center because Berger would be blocked from installing the proper access roads required by the state to enter its facility. It also asserts that because CBCC’s screening doesn’t shield the Berger property from views of the mining, noise, and dust, it can’t use its property for a health care facility.
The health system also submits that the area land use plan “targets development” for specific areas using significant data. Berger notes the area west of U.S. 23 is targeted for development of aggregate mining because of the abundance of sand and gravel deposits identified in the area and the difficulty in developing it for any other uses.
Friend-of-the-Court Briefs Submitted
An amicus curiae brief supporting the CBCC’s position has been submitted jointly by the Ohio Aggregates and Industrial Miners Association, Flexible Pavements of Ohio; the Ohio Ready Mixed Concrete Association; and the Ohio Contractors Association.
The Ohio Prosecuting Attorneys Association filed an amicus brief supporting Harrison Township. Joint briefs supporting the township were submitted by the Pickaway County Board of Commissioners, and the villages of Ashville and South Bloomfield, as well as by the Ohio Township Association and the County Commissioners Association of Ohio.
- Dan Trevas
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing the Columbus Bituminous Concrete Corporation et al.: Catherine Cunningham, 614.462.5486
Representing Harrison Township Board of Zoning Appeals from the Pickaway County Prosecutor’s Office: Jayme Fountain, 740.474.6066
Representing Berger Health Systems: Jennifer Flint, 614.227.2316
Does State Law Mandate 22 Months of Children Services Agency Involvement Before Terminating Parents’ Rights?
In the Matter of N.M.P., Case no. 2018-1842
Eleventh District Court of Appeals (Portage County)
ISSUE: Is a family services agency only permitted to obtain permanent custody of a child under R.C. 2151.414(B)(1)(d) when the child has been in the temporary custody of family services agencies for 12 months during a consecutive 22-month period of agency involvement?
BACKGROUND:
In March 2015, the Portage County Juvenile Court placed a child identified as N.M.P. in the temporary custody of the Portage County Department of Job and Family Services. The juvenile court determined 8-year-old N.M.P. was a “dependent child,” as defined in R.C. 2151.04, at an April 24 adjudicatory hearing, and the child remained in the agency’s temporary custody. In March 2017, the child’s mother, Nicole Hofeldt, regained custody of N.M.P.
About two months later, in May 2017, the Portage County family services agency filed a complaint with the juvenile court requesting emergency temporary custody of N.M.P., which was approved the same day. The court held an adjudicatory hearing on June 14 and issued a decision on June 22. The disposition hearing was held on July 28, and a magistrate ruled in August to keep N.M.P. in the temporary custody of Portage County family services.
The agency later reported that neither Hofeldt nor the child’s father, John Puleo Sr., made progress toward reunifying with their child. Puleo had no contact with N.M.P. after August 2015, and Hofeldt hadn’t contacted N.M.P. since July 2017 and didn’t complete any steps in her case plan, according to the agency’s brief. On June 5, 2018, the agency filed a motion asking for permanent custody of N.M.P., and the court approved that request on July 25.
Appeals Courts’ Decisions Conflict on Issue
Hofeldt appealed to the Eleventh District Court of Appeals, which upheld the juvenile court’s decision. The Eleventh District certified that its opinion conflicted with a 2017 ruling from the Sixth District Court of Appeals (In re K.L.) and notified the Ohio Supreme Court. Agreeing that a conflict exists between the appellate courts’ rulings, the Supreme Court will review the issue.
Courts Grant Permanent Custody to Children Services for Specific Reasons
A court may grant a children services agency permanent custody of a child based on five grounds listed in R.C. 2151.414(B)(1). One of the grounds, listed in subsection (B)(1)(d), states, “The child has been in the temporary custody of one or more public children services agencies or private child placing agencies for twelve or more months of a consecutive twenty-two-month period ….”
The statute also notes: “For the purposes of division (B)(1) of this section, a child shall be considered to have entered the temporary custody of an agency on the earlier of the date the child is adjudicated pursuant to section 2151.28 of the Revised Code or the date that is sixty days after the removal of the child from home.”
Under another statute, R.C. 2151.413(D), an agency must file a motion for permanent custody if the child has been in the “temporary custody of one or more public children services agencies or private child placing agencies for twelve or more months of a consecutive twenty-two-month period.”
Mother States Time Calculation Wrong, She Wasn’t Given Full 12 Months to Regain Custody
Hofeldt adopts the Sixth District’s interpretation in K.L. that the (B)(1)(d) reason means that the children services agency must have 22 months of involvement with the child before it files for permanent custody. Specifically, K.L. stated:
“The purpose of the ‘12 of 22 consecutive months’ clause is clear when it is read in conjunction with R.C. 2151.413(D), which provides that the agency who has had temporary custody of a child for 12 months of a 22-month consecutive period must file a motion for permanent custody. … If the 22-consecutive months does not mean 22 months of agency involvement, there was no need to set forth that number in the statute. Instead, the statute would have required permanent custody to have been sought after 12 months of temporary custody had expired, regardless of whether temporary custody was intermittent or continuous.”
Hofeldt also points to Ohio Supreme Court decisions describing the termination of parental rights as the equivalent of the death penalty in a criminal case and as an alternative of last resort. In re C.W., a 2004 Supreme Court ruling, stated:
“Therefore, in light of the purpose of R.C. Chapter 2151 and a court’s obligation to provide parents with procedural protections in permanent custody proceedings, an agency must afford parents the full 12-month period to work toward reunification before moving for permanent custody on R.C. 2151.414(B)(1)(d) grounds.”
In Hofeldt’s view, this 12-month period doesn’t begin until after a court approves a case plan at the disposition hearing. Citing another statute in the juvenile laws indicating that a children services agency must make reasonable reunification efforts and provide the required services in the case plan to the family before seeking permanent custody, Hofeldt argues that the time period an agency has temporary custody isn’t equal to the time that parents have to work toward reunification. Case plans often mandate that parents attend months of parenting classes, drug and alcohol counseling, and mental health counseling; demonstrate a certain period of sobriety; and establish stable housing and employment. She maintains that parents must be given a true 12 months to make these efforts toward reunification with a child.
She contends that the “12 of 22” time calculation in her case began on June 22, 2017 – the date the magistrate issued a decision following the adjudicatory hearing. Per C.W., the calculation ends on the date the agency filed its request for permanent custody with the court– June 5, 2018. That’s 11 months and 14 days, less than the required 12 months, she argues. To seek permanent custody before the 22 months of agency involvement transpired, the children services agency had to use one of the other grounds listed in R.C. 2151.414(B)(1), she states.
She adds that the case plan she was required to follow wasn’t adopted until the court’s Aug. 30 decision after the dispositional hearing. From that date until the agency filed for permanent custody, she was given only nine months to work toward the return of her child.
She also contests the agency’s calculations, because they include the time that N.M.P. was in its custody in a separate case with the agency during the 2015-2017 timeframe.
Family Services Agency Maintains ’12-of-22’ Months Requirement Was Met
The Portage County family services agency maintains that the Supreme Court’s decision in this case won’t stop the termination of Hofeldt’s parental rights because the juvenile court gave the agency permanent custody based on three of the five grounds in R.C. 2151.414(B)(1). The Eleventh District upheld two of the reasons and didn’t address the third. Any decision by the Court about subsection (d) in this case would be only advisory because the juvenile court’s decision based on the abandonment grounds would still stand, the agency states, requesting that the Court dismiss the appeal.
On the substance of Hofeldt’s arguments, the agency counts backwards from the date that the request for permanent custody was filed – June 5, 2018. Twenty-two months prior to that date is Aug. 5, 2016. During that timeframe, N.M.P. was in the agency’s custody for more than 18 months – the 11 months and 14 days that Hofeldt calculates plus additional months after the agency had temporary custody between 2015 and March 2017, it argues.
The agency maintains that, except for the Sixth District, all of the appellate courts that have considered this issue view the 22-month timeframe without regard to children services’ involvement.
“The purpose of R.C. 2151.414(B)(1)(d) is to balance the rights of the parents along with the need to achieve a speedy resolution to custody so that a child will not languish in foster care indefinitely,” the agency’s brief states. “Requiring a consecutive period of twenty-two months of agency involvement frustrates this purpose by unnecessarily extending the time that the child is in temporary custody.”
The agency concludes that it had custody of N.M.P. for more than 12 months during the 22 months before filing for permanent custody. The agency adds that the 22-month time period in R.C. 2151.414(B)(1)(d) doesn’t state that a children services agency must be involved during that entire timeframe, and the agency maintains that the statute’s language is clear and unambiguous. The 12-of-22 provision is only one factor a court considers when deciding whether to give a children services agency permanent custody of a child, the agency notes. The law also requires the agency to show that the step would be in the child’s best interest, it states.
The agency reasons that parental rights are fully protected by the current juvenile laws.
Father and Guardian Didn’t File Briefs
Neither Puleo nor Richard Lombardi, guardian ad litem in this matter, filed merit briefs in the case. When a party fails to submit a merit brief, the party waives the right to participate in oral argument before the Supreme Court.
- Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing Nicole Hofeldt: Neil Agarwal, 330.554.7700
Representing Portage County Department of Job and Family Services from the Portage County Prosecutor’s Office: Brandon Wheeler, 330.297.3850
Can Owner Collect Damages from Pawnshop that Disassembled and Sold Her Stolen Jewelry?
Irene Danopulos v. American Trading II LLC, Case no. 2018-1157
First District Court of Appeals (Hamilton County)
ISSUES:
- If a pawnbroker complies with R.C. 4227.09 and R.C. 4727.12, must the original property owner, suing the broker for conversion, prove a demand was made to the broker for the return of the property and the broker refused before the property was resold?
- Does a pawnbroker sufficiently comply with R.C. 4227.09 and R.C. 4727.12 if the broker reports items it purchased to the county sheriff rather than the city police chief for the city in which the store is located?
- If the broker intentionally disassembled the merchandise for resale, is a property owner suing the pawnbroker for conversion exempt from proving a demand was made for the return of the property and the broker refused?
BACKGROUND:
In June 2014, burglars stole jewelry from the Washington Township residence of Irene Danopulos in Montgomery County. American Trading operates a pawn shop in Cheviot in neighboring Hamilton County. Three days after the theft, American Trading purchased three jewelry items from 19-year-old Steven Tyler Moore of Richmond, Kentucky, an alleged accomplice to the burglary. American Trading paid Moore $2,125 for the items and reported the purchase to the Hamilton County Sheriff’s Office. After holding the items for more than 15 days, American Trading disassembled and sold the jewelry to various buyers for $7,064.
In mid-July, Montgomery County Sheriff’s Department Detective Gary Ridgeway visited American Trading and inquired about the jewelry. After reviewing documentation with the staff, Ridgeway determined the jewelry sold there belonged to Danopulos. He requested it be returned. American Trading no longer had the jewelry and didn’t return it.
Danopulos filed a lawsuit against American Trading in Hamilton County Common Pleas Court, claiming conversion, which is the wrongful use or withholding of someone else’s property to the exclusion of the owner. The pawnshop asked the trial court for summary judgment, arguing it couldn’t be held liable for conversion because it complied with the provisions of the Ohio Pawnbrokers Act, specifically R.C. 4727.09 and R.C. 4727.12, which specify a 15-day holding period. The trial court agreed with American Trading, and Danopulos appealed to the First District Court of Appeals.
The First District reversed, finding compliance with the statutes alone doesn’t excuse American Trading if the goods were stolen. The appellate court remanded the case to the common pleas court. The trial court conducted a bench trial and found that based on the facts and compliance with R.C. 4727.09 and R.C. 4727.12, American Trading wasn’t liable.
Danopulos again appealed to the First District. The First District reversed a second time, finding that even if American Trading was the “lawful” possessor of the stolen jewelry when the company intentionally disassembled the jewelry it became liable for conversion.
American Trading appealed the First District’s decision to the Supreme Court, which agreed to hear the case.
Shop Had Right to Sell Jewelry, Broker Argues
American Trading argues that to prove conversion a property owner must establish three things: the owner’s right to possession at the time of the conversion; the broker, by a wrongful act, disposed of the owner’s property; and the owner suffered damages. If the broker “comes into the possession of the property lawfully,” then to prevail in a conversion claim, the owner must also prove that the owner demanded the return of the property while the broker was in control of it and that the broker refused to deliver the goods.
Ohio courts have applied this second “demand and refusal” requirement when a broker has innocently obtained stolen property, American Trading explains. The shop argues that by complying with R.C. 4727.09(A), it innocently obtained stolen property. The law requires the pawnbroker to furnish local law enforcement with a description of all property pledged with or purchased by a broker, and the broker must number each item. If the shop is located in a city, it must report it to the chief of police of that city.
American Trading employed Hamilton County Sheriff’s Department Major Nick Coyle part time, and he testified that the city of Cheviot police department didn’t want pawnshop reports, so instead the department directed shops to make the reports to the sheriff’s department. The shop argues that it substantially complied with the law by reporting to the sheriff. The company notes it also followed R.C. 4727.12(B) by retaining the property for more than 15 days before selling it, placing the shop in full compliance with the act. By following the law, American Trading was in legal possession of the items, meaning Danopulos had to demand their return and be refused while the shop was in possession of the jewelry, the shop asserts. Because she didn’t, the company isn’t liable for conversion, it maintains.
Disassembly Not a Factor, Shop Maintains
The company explains that instead of focusing on the shop’s compliance with the Pawnbrokers Act, the First District examined whether the shop could be held liable under a tort claim. The company explains the First District concluded that if a broker sells an item that the broker didn’t know was stolen, the broker can’t be sued for conversion, but can be sued for negligence. A claim of negligence by a broker doesn’t apply to situations where the broker “intentionally” fails to return the stolen goods to the owner. That would be an intentional tort, the company explains. And the First District found American Trading committed the intentional tort of conversion.
American Trading asserts the First District didn’t explain why the disassembly of the jewelry was an “intentional” act that made it liable for conversion. The company argues the appellate court wasn’t clear whether the disassembly was the wrongful intentional act or selling the disassembled jewelry was the act that made it liable. The company maintains the whole theory is misplaced because pawnshops and other secondhand jewelry purchasers regularly disassemble jewelry for sale as parts for higher prices. The shop was within its rights to take apart the jewelry, and sell it after 15 days, it maintains. The company argues it didn’t fail to return the property because it had the legal right to sell the merchandise.
American Trading concludes that pawnshops must be able to rely on the protections against conversion claims by following state law. Refusing to consider a pawnbroker’s compliance with the Pawnbrokers Act creates “uncertainty and inconsistency in the pawnbroker industry,” the company’s brief states.
Pawnshop Disregarded State Law, Owner Asserts
Danopulos argues American Trading’s disregard for state law makes the company an illegal possessor of the property and relieves the owner of having to meet the “demand and refusal” requirement of a conversion claim. The owner cites R.C. 2913.51, which prohibits the receipt and disposal of stolen property, and notes that Moore’s attempt to sell, not pawn, the jewelry should have made American Trading suspicious that the items were stolen.
The paperwork indicates that American Trading owner John Perkins personally handled the sale of the merchandise, which she valued at $39,000, Danopulos argues. She asserts that Perkins and the store staff were evasive when questioned by Ridgeway, and they sold the jewelry as quickly as possible.
“Far from obtaining the jewelry legally, American Trading knew or should have known that the jewelry was stolen,” Danopulos’ brief states. “American Trading apparently disposed of the items and gave ‘odd’ responses when responding to Detective Ridgeway during his initial visit to American Trading’s store, and in a follow-up phone call from the Detective.”
Danopulos questions why the trial court agreed with American Trading’s argument that it substantially complied with the law when it reported the merchandise to the sheriff’s department. She maintains that the store isn’t allowed to ignore the specific language of R.C. 4727.09, which required American Trading to report the jewelry to the Cheviot police chief. She notes that Coyle’s testimony was the only evidence presented at the trial that suggested the police department didn’t want to take pawnshop reports.
The shop’s failure to follow the law indicates American Trading wasn’t a lawful possessor, Danopulos states, and all she had to prove was that the store’s possession of the jewelry was inconsistent with her right to possess it, she asserts. Because she proved that, the Court should hold American Trading liable for conversion, Danopulos concludes.
Friend-of-the Court Brief Filed
An amicus curiae brief supporting American Trading’s position has been submitted jointly by the Ohio Pawnbrokers Association, the Ohio Council of Retail Merchants, the Jewelers’ Security Alliance, and the Mid-West Jewelers Association.
- Dan Trevas
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing American Trading II LLC: Robert Thumann, 513.381.5050
Representing Irene Danopulos: Michael Conway, 937.294.8807
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