Victor E. Steinfels, Iii v. the Ohio Department of Commerce, Division of Securities
| Decision Date | 17 September 1998 |
| Docket Number | 98-LW-5331,98AP-470 |
| Parties | Victor E. Steinfels, III, Plaintiff-Appellant, v. The Ohio Department of Commerce, Division of Securities, Defendant-Appellee |
| Court | Ohio Court of Appeals |
APPEAL from the Franklin County Court of Common Pleas.
Robert J. Behal, for appellant.
Betty D. Montgomery, Attorney General, and Stephen H. Johnson, for appellee.
On Feburary 28, 1995, the Ohio Department of Commerce, Division of Securities ("division") issued an order, a notice of intent to issue a cease and desist order and a notice of opportunity of a hearing to Victor E. Steinfels III. An amended order was issued on or about March 15, 1995 alleging Mr. Steinfels violated R.C. 1707.44(B)(4) and (G). The order arose out of a division investigation into the activities of Mr. Steinfels in regard to the sale of certain partnership units to Steven A. Miller and the then Palmer-Miller Insurance Agency ("Palmer-Miller").
Mr. Steinfels requested a hearing. On September 7, 1995, a hearing was held before a hearing officer. On January 3, 1996, the hearing officer's report and recommendation was mailed to Mr. Steinfels. The report and recommendation concluded Mr. Steinfels violated R.C. 1707.44(B)(4) and (G) and recommended a cease and desist order be issued against Mr. Steinfels.
On March 29, 1996, the division issued a final order approving the hearing officer's recommendation and ordering Mr. Steinfels cease and desist from the acts and practices which violate the Ohio Securities Act. Mr. Steinfels appealed the final order to the Franklin County Court of Common Pleas.
On February 3, 1998, the common pleas court rendered its decision, finding the division's order was supported by reliable, probative and substantial evidence and was in accordance with law. A judgment entry was journalized on March 25, 1998.
Mr. Steinfels (hereinafter "appellant") has appealed to this court, assigning the following as error:
"THE TRIAL COURT ERRED TO THE PREJUDICE OF APPELLANT, IN FINDING THAT RELIABLE, PROBATIVE AND SUBSTANTIAL EVIDENCE SUPPORTED THE FINDING OF THE APPELLEE AT THE ADMINISTRATIVE LEVEL THAT THE APPELLANT MADE MATERIAL MISREPRESENTATIONS OR NON-DISCLOSURES IN CONNECTION WITH THE SALE OF A SECURITY, IN VIOLATION OF SECTION 1707.44(B)(4) and (G) O.R.C., WHEN SUCH FINDING WAS AGAINST THE MANIFEST WEIGHT OF THE EVIDENCE AND CONTRARY TO LAW."
We note first the varying standards of review for the common pleas court and this court. R.C. 119.12 states, in pertinent part:
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The common pleas court engages in two inquires: a hybrid factual/legal inquiry and a purely legal inquiry. Ohio Historical Soc. v. State Emp. Relations Bd. (1993), 66 Ohio St.3d 466, 470. However, an appellate court's role is more limited. While it is incumbent upon the common pleas court to examine the evidence, such is not the charge of the appellate court. Rossford Exempted Village School Dist. Bd of Edn. v. State Bd. of Edn. (1992), 63 Ohio St.3d 705, 707, quoting Lorain City Bd. of Edn. v. State Emp. Relations Bd. (1988), 40 Ohio St.3d 257, 260-261. The appellate court determines only if the trial court abused its discretion. Rossford Exempted Village School Dist. Bd. of Edn. at 707. However, on purely legal questions, the appellate court's review is plenary. McGee v. Ohio State Bd. of Psychology (1993), 82 Ohio App.3d 301, 305, citing Univ. Hosp., Univ. of Cincinnati College of Medicine v. State Emp. Relations Bd. (1992), 63 Ohio St.3d 339, paragraph one of the syllabus.
By way of background, this case arose out of the sale by appellant of two partnership units in Vesmont Partners Ltd. ("Partners") to Mr. Miller and his company, Palmer-Miller. Appellant had created a drink mug in the shape of a football helmet. Appellant had formed Vesmont Management Group, Inc. ("Vesmont"), a corporation which engaged in the manufacture of the mug. Appellant was the majority shareholder, chairman of the board and chief executive officer of Vesmont. Vesmont was the general partner of Partners, a limited partnership which was formed to help raise capital for Vesmont.
Part of the offering materials given to Mr. Miller prior to the sale of the partnership units included an agreement between Vesmont and appellant. This agreement included terms relating to the patent rights to the mug. This agreement (hereinafter referred to as "the third agreement") included provisions whereby appellant assigned his rights to any patent or pending patent to the mug to Vesmont, and Vesmont had sole and exclusive patent rights in the mug. Mr. Miller testified that it was of paramount importance to him that Vesmont have the patent rights to the mug. On or about July 15, 1992, Mr. Miller signed a subscription agreement for one unit in Partners and on or about July 22, 1992, Mr. Miller, individually, bought one unit in Partners for $25,000. Patents had not yet been issued on the mug, but a patent application was pending.
Vesmont began having financial difficulties and by September 1, 1993, appellant had signed proxies which effectively gave control of Vesmont to Robert Cseplo, the owner of certain molds used to produce the mugs. According to appellant, he feared Mr. Cseplo and Bret Adams, both of whom had assumed control of Vesmont's board of directors, would abscond with any patent rights to the mug. Therefore, on March 22, 1994, appellant sent Vesmont a letter, notifying it that appellant was terminating the agreement between appellant and Vesmont, including termination of Vesmont's "right to use the helmet mug design."
The "agreement" appellant referred to in the March 22, 1994 letter had been executed prior to the third agreement discussed above. This original agreement between Vesmont and appellant (hereinafter referred to as "the first agreement") differed from the third agreement shown to Mr. Miller. Such differing terms included: appellant (not Vesmont) had sole and exclusive rights to the mug; a payment of $250,000 by Vesmont to appellant on or before June 30, 1992; a royalty payment by Vesmont to appellant of one percent of Vesmont's gross receipts from the sale of mugs; and the right of either party to terminate the agreement due to material breach. Again, none of these terms were part of the third agreement shown to Mr. Miller.
In August 1994, a patent was issued. Sometime in 1994, after the March 22, 1994 termination letter, appellant assigned his rights to any patent and/or pending patent to his sister's company which had been marketing the mug in the Texas area.
As indicated above, the hearing examiner concluded that appellant, in selling the partnership units (which are considered securities under the applicable statutes) to Mr. Miller, violated R.C. 1707.44(B)(4) and (G). R.C. 1707.44(B)(4) states:
The hearing examiner concluded appellant violated R.C. 1707.44(B)(4) because appellant made false representations regarding patent rights and the early termination provision. (See Report and Recommendation, Conclusion of Law No. 12.) The hearing examiner found that Mr. Miller believed, based upon appellant's representations, the patent was already in existence and had been assigned to Vesmont or that appellant personally had a right to the pending patent and that Vesmont owning the patent rights was of paramount importance to Mr. Miller. ( of fact No. 18.) The hearing examiner also concluded that appellant did not disclose the existence of the early termination provision (in the first agreement) to Mr. Miller. (Conclusion of law No. 10.)
The trial court stated that appellant portrayed to Mr. Miller that Vesmont had the rights to any pending patent, but appellant assigned the patent rights to another company. (Trial court decision at 5.) The trial court found that appellant's representations to Mr. Miller regarding the patent rights were hollow promises because appellant relied on the third agreement only when it suited him and at other times, relied on the first agreement. Id. at 6. The trial court concluded that an affirmative misrepresentation occurred because appellant indicated to Mr. Miller that the third agreement was the operative agreement, the provisions of such third agreement did not in fact apply, and Vesmont did not hold the patent rights. Id. at 9. We note that the trial court stated earlier that it would likely find the third agreement was the operative agreement, but appellant never conducted himself as though it was. Id.
In State v. Warner (1990), 55 Ohio St.3d 31, paragraph two of the syllabus, the Supreme Court held:
"R.C. 1707.44(B)(4) and (J) prohibit only affirmative misrepresentation; they do not apply to fraudulent nondisclosure."
As indicated above, the hearing examiner concluded appellant violated R.C. 1707.44(B)(4), in part, because appellant did not disclose the early termination provision contained in the first agreement. However, this cannot, as a matter of law,...
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