magistrate's decision in odi litigation

IN THE COURT OF COMMON PLEAS OF FRANKLIN COUNTY, OHIO

OHIO ASSOCIATION OF INDEPENDENT:TITLE AGENTS, ET AL.,

Plaintiffs,

vs.

MARY JO HUDSON, DIRECTOR,OHIO DEPARTMENT OF INSURANCE,

Defendant.

CASE NO. 09CVH-05-6663

JUDGE HORTON

MAGISTRATE PETRUCCI

MAGISTRATE'S DECISION DENYING PLAINTIFFS' MOTION FOR SUMMARYJUDGMENT AS FILED ON APRIL 30, 2010,

ANDMAGISTRATE'S DECISION GRANTING DEFENDANT'S MOTION FOR SUVILARY:: .

JUDGMENT IN PART AS FILED ON MAY 14, 20101AND,

MAGISTRATE'S DECISION HOLDING MOOT PLAINTIFFS' REQUEST FOIE_ ANORAL HEARING AS FILED ON JULY 6, 2010.

.,7=t Fg

'7; f21011Rendered this 17th day of September, 2010f.

Petrucci, Magistrate .:(2) -55

Pursuant to Civil Rule 53 and Local Rule 99.02, this case was referred to undersigned for

the following: "Motion Hearing: Plaintiff's Summary Judgment filed 4/30/10, Defendant's Memo

Contra filed 5/17/10, Plaintiff's reply filed 5/21/10; Defendant's Summary Judgment filed 5/14/10,

Plaintiff's Memo Contra filed 5/27/10, Plaintiff's Notice of Supplemental Authority and Request

for Motion Hearing filed 7/6/10." See Order of Reference filed on August 23, 2010.

The parties conducted an Oral Argument on September 9, 2010. The undersigned has

reviewed all pleadings filed plus the attachments; the undersigned also has taken into consideration

the arguments of counsel as advanced at the Oral argument of September 9, 2010. After a

complete review of the matter the undersigned comes to the following Findings of Facts and

Conclusions of Law.

FINDINGS OF FACTS

On January 1, 2007 the Defendant, pursuant to its rule making authority, adopted OAC

§3901-7-04. Said section was/is titled, 'Title insurance controlled business arrangements'. The

purpose of the rule was to aid the Defendant in establishing the ownership and licensing standards

for title insurance agencies operating within the state of Ohio. This matter turns upon the interplay

between OAC §3901-7-04 and R.C. §3953.21.

Plaintiffs claim various reasons why the Defendant was mistaken in creating OAC §3901-

7-04. Defendant has asserted a number of reasons why the code and the administrative rule are not

in conflict. All parties have asserted that the issues presented are questions of law susceptible to

summary judgment.

STANDARD OF REVIEW

A motion for summary judgment is governed by Rule 56(C) of the Ohio Rules of Civil

Procedure. Rule 56(C) provides, in pertinent part, that:

Summary judgment shall be rendered forthwith if the pleadings, depositions,answers to interrogatories, written admissions, affidavits, transcripts of evidence inthe pending case, and written stipulations of fact, if any, timely filed in the action,show that there is no genuine issue of material fact and that the moving party isentitled to judgment as a matter of law. No evidence or stipulation may beconsidered except as stated in this rule. A summary judgment shall not be renderedunless it appears from such evidence or stipulation and only therefrom, thatreasonable minds can come to but one conclusion and that conclusion is adverse tothe party against whom the motion for summary judgment is made, such partybeing entitled to have the evidence or stipulation construed most strongly in hisfavor.

The Supreme Court of Ohio has adopted a three-part standard to be used when deciding if

summary judgment is appropriate. The moving party must show:

(1) [T]hat there is no genuine issue as to any material fact; (2) that the movingparty is entitled to judgment as a matter of law; and (3) that reasonable minds cancome to but one conclusion, and that conclusion is adverse to the party againstwhom the motion for summary judgment is made, who is entitled to have the

Case No: 09CVH-05-6663

evidence construed most strongly in his favor. Harless v. Willis Day WarehousingCo.(1978), 54 Ohio St.2d 64, 66.

Additionally, the nonmoving party must go beyond the allegations or denials contained in

their pleadings and affitivatively demonstrate the existence of a genuine issue of material fact in

order to prevent the granting of a motion for summary judgment. Mitseff v. Wheeler (1988), 38

Ohio St.3d 112.

Moreover, the entry of summary judgment against a party is mandated when the

nonmoving party:

[Flails to make a showing sufficient to establish the existence of an elementessential to that party's case, and on which that party will bear the burden of proofat trial * * * [by designating] specific facts showing that there is a genuine issue fortrial. Celotex Corp. v. Catrett (1986) 477 U.S. 317.

The Supreme Court of Ohio has adopted and approved the Celotex burden on the

nonmoving party, provided that the moving party met its initial burden of informing the court of

the basis for the motion and identifying portions of the record demonstrating the absence of any

genuine issue of material fact. Dresher v. Burt (1996), 75 Ohio St.3d 280.

All parties to this proceeding have asserted that the issues in this case are questions of law

and not of fact. Hence, both parties have asserted that summary judgment is appropriate.

This case deals with the interplay between a code and a statute. Concerning that area of the

law, please note the following:

Administrative rules issued pursuant to statutory authority are valid and enforceableunless they are unreasonable or in clear conflict with legislation governing thesubject matter. Hoffman v. State Med. Bd., 113 Ohio St.3d 376, 2007-Ohio-2201,at ¶17; State ex rel. Celebreeze v. Natl. Lime & Stone Co. (1994), 68 Ohio St.3d377, 382, citing Youngstown Sheet & Tube Co. v. Lindley (1988), 38 Ohio St.3d232, 234. "'When the potential for conflict arises, the proper subject fordetermination is whether the rule contravenes an express provision of the statute.' "Brindle v. State Med. Bd. of Ohio, 168 Ohio App.3d 485, 2006-Ohio-4364, at ¶30,quoting Woodbridge Partners Group, Inc. v. Ohio Lottery Comm. (1994), 99 OhioApp.3d 269, 273.


"When interpreting statutes, courts must give due deference to those interpretationsby an agency that has accumulated substantial expertise and to which the GeneralAssembly has delegated enforcement responsibility." Shell v. Ohio VeterinaryMed. Licensing Bd., 105 Ohio St.3d 420, 2005-Ohio-2423, at ¶34. See, alsoNorthwestern Ohio Bldg. & Constr. Trades Council v. Conrad (2001), 92 OhioSt.3d 282, 289 (recognizing that courts must accord due deference to theinterpretation formulated by an administrative agency that has accumulatedsubstantial expertise and "to which the General Assembly has delegated theresponsibility of implementing the legislative command"). If a statute provides anadministrative agency authority to perform a specified act but does not provide thedetails by which the act should be performed, the agency is to perform the act in areasonable manner based upon a reasonable construction of the statutory scheme.Id. at 287-288. See, also, Regions Hosp. v. Shalala (1998), 522 U.S. 448, 449-450,and Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (1984), 467U.S. 837, 843 (observing that if the statute is silent or ambiguous as to the specificissue, the question for the court is whether the agency's answer is based on apermissible construction of the statute). "An agency's reading that fills a gap ordefines a term in a reasonable way in light of the Legislature's design controls, evenif it is not the answer the court would have reached in the first instance." RegionsHosp., at 450, citing Chevron, at 843, fn. 11. Cosby v. Franklin County Dept. ofJoband Family Services, 2007-Ohio-6641 at 37 & 38.

In regard to a statute the following case law is helpful:

In construing a statute, a court's paramount concern is the legislative intent. Proctorv. Kardassilaris, 115 Ohio St.3d 71, 2007-Ohio-4838, at ¶12. In determining thelegislative intent, we first look to the language in the statute and the purpose to beaccomplished. State ex rel. Herman v. Klopfleisch (1995), 72 Ohio St.3d 581, 584,citing State v. S.R. (1992), 63 Ohio St.3d 590, 594-595. If the meaning of a statuteis clear on its face, then it must be applied as written. Lake Hosp. Sys., Inc. v. OhioIns. Guar Assn. (1994), 69 Ohio St.3d 521, 524-525. Cosby v. Franklin CountyDept. ofJob and Family Services, 2007-Ohio-6641 at ¶ 18.

From within the above noted framework the undersigned will review the pleadings; exhibits and

argument of counsel.

ANALYSIS

As to the issues, both parties have claimed that the case is susceptible to summary

judgment because the issues turn on the legal interpretation of codes and rules. Having agreed on

that point the parties diverge in their respective positions.


Another point of agreement can be noticed from the motions. The Plaintiffs did not assert

that the rule had been promulgated outside of the requirements of Chapter 119 of the Revised

Code. Hence, the rule is not being attacked as to the process of its creation. The argument is

limited to the Plaintiffs' assertion that the rule is outside of the rulemaking authority of the

Defendant.

The undersigned will address the two pending motions for summary judgment together.

Motions for Summary Judgment:

Plaintiffs firmly believe that O.A.C. §3901-7-04 violates R.C. §3953.21(B). The

Defendant disagrees. The Plaintiffs have asserted that the Defendant, in creating the rule, has

overstepped her authority and has created a rule that defeats the purpose behind the statute. First

the undersigned must turn to the language of the code and rule. Please note the following from the

code:

3953.21. Certification of title insurance agents(B) No bank, trust company, bank and trust company, or other lending institution,mortgage service, brokerage, mortgage guaranty company, escrow company, realestate company or any subsidiaries thereof or any individuals so engaged shall bepermitted to act as an agent for a title insurance company.History. Effective Date: 09-01-2002

The administrate rule language contested by the Plaintiffs reads as follows:

3901-7-04. Title insurance controlled business arrangements(A) Purpose. The purpose of this rule is to establish ownership and licensingstandards for title insurance agents and agencies in accordance with division (B) ofsection 3953.21 of the Revised Code, which prohibits certain persons from actingas agents for a title insurance company.(B) Authority. This rule promulgated pursuant to the authority vested in thesuperintendent under section 3901.041 of the Revised Code.(C) Definitions. As used in this rule:(1) "Beneficial ownership" means the effective ownership of any interest in a titleinsurance agency or the right to control an ownership interest even though legalownership may be held in another person's name.(2) "Control," including "controlling", "controlled by", and "under common controlwith" means the possession, direct or indirect, of the power to direct or cause the


direction of the management and policies of a person, whether through theownership of voting securities, by contract other than a commercial contract forgoods or non-management services, or otherwise. Control shall be presumed toexist if any person, directly or indirectly, owns, controls, holds with the powerto vote, or holds proxies representing fifty percent or more of the votingsecurities or interests of any other person. Control shall also be presumed to existbetween a natural person and an immediate family member. These presumptionsmay be rebutted by showing that control does not exist in fact. The superintendentof insurance may determine that control exists if the facts support such adetermination notwithstanding the absence of a presumption to that effect.(Emphasis added)

The Plaintiffs have asserted that the rule drafted by the Defendant violates the 'Carroll Test'.

Hence the Plaintiffs rely on Carroll v. Dept. of Adm. Serv., 10 Ohio App.3d 108, a case from the

Tenth District Court of Appeals dealing with the attempt of an administrator to order medical

exams. The Carroll syllabus reads as follows:

1.The purpose of administrative rule-making is to facilitate the implementationof legislative policy.

2. Because his power is administrative rather than legislative in nature, theDirector of Administrative Services may not issue rules which are unreasonable,which conflict with statutory enactments covering the subject matter, or which addto his delegated powers. Id.

The Carroll case held that the exams authorized by the administrative rule went too far and did not

relate or stem from the statute that authorized the administrator to act. Therefore the Carroll court

held that the rule was inappropriate.

As in Carroll the Plaintiffs asserted that the Defendant has overstepped her authority when

she adopted O.A.C. §3901-7-04. To support that argument the Plaintiffs claimed that rule conflicts

with R.C. §3901.32(B). Please note the following from said code:

§ 3901.32. Insurance holding company system definitionsAs used in sections 3901.32 to 3901.37 of the Revised Code:(B) "Control," including "controlling," "controlled by," and "under common

control with," means the possession, direct or indirect, of the power to direct orcause the direction of the management and policies of a person, whether throughthe ownership of voting securities, by contract other than a commercial contract forgoods or nonmanagement services, or otherwise, unless the power is the result of an


official position with or corporate office held by the person. Control shall bepresumed to exist if any person, directly or indirectly, owns, controls, holdswith the power to vote, or holds proxies representing, ten per cent or more ofthe voting securities of any other person. This presumption may be rebutted by ashowing made in the manner provided in division (J) of section 3901.33 of theRevised Code that control does not exist in fact. The superintendent of insurancemay determine, after furnishing all persons in interest notice and opportunity to beheard and making specific findings of fact to support such determination, thatcontrol exists in fact, notwithstanding the absence of a presumption to that effect.(Emphasis added)

It is Plaintiffs position that 10% is the standard that applies for all insurance issues and the

Defendant was wrong to adopt a rule that allowed the presumption to only be triggered at the 50%

level noted in the rule.

Plaintiffs then buttressed their arguments by stating that R.C. §3901.32(B) contains the

only definition of 'control' in the insurance statutes of this state and, therefore that code section

must be followed by the Defendant. Because 50% is greater than 10%, the Plaintiffs argued that

the rule exceeded the authority that flowed from the statute. Based on Carroll, the rule must

therefore be invalid, or so the Plaintiffs asserted.

Plaintiffs then advance a number of areas where the General Assembly has shown a

willingness to restrict access to a regulated industry. From that knowledge, the Plaintiffs asserted

that it would 'make no sense' that the General Assembly would want such a liberal interpretation

of control as now found in O.A.C. §3901-7-04.

The Defendant responded to these arguments by first noting that there exists no statutory

language that directly conflicts with the rule. The Defendant asserted that she is given a great deal

of authority as manifested in R.C. §3901.041. The Defendant asserted that it would be 'difficult to

conceive' a regulation of the industry that could fall outside of the scope of her power to

promulgate rules.


The Defendant reminded the Court that the rule had cleared the Joint Committee on

Agency Rule Review without incident, suggesting that the General Assembly was not concerned

with the rule. Next, the Defendant pointed out that the 10% level in R.C. §3901.23(B) as argued

by the Plaintiffs, is misapplied. Revised Code.§3901.23(B) deals with 'insurance holding

company systems'. Defendant claimed that said statute has nothing to do with the regulation of

title insurance agents. There is a great deal of merit in that argument.

Revised Code §3901.23 has the following language in it: 'As used in sections 3901.32 to

3901.37 of the Revised Code'. The section of the code regulating title insurance is found in R.C.

§3953. Hence, the statute relied upon by the Plaintiffs limits its language to sections of the statute

not at issue. The rule in question was drafted 'in accordance with division (B) of section 3953.21

of the Revised Code' and it was promulgated pursuant to the authority of §3901.041 of the code.

Hence, the General Assembly did not mean to enforce a 10% 'control' test on all aspects of

insurance regulations. The Defendant argued that had the General Assembly wished to mandate a

certain level of 'control' within R.C. §3953 it could have easily done so. It did not. Therefore, the

Plaintiffs argument must fail.

The Defendant also reminded the undersigned that the burden is on the Plaintiffs to prove

that the rule is in conflict with a statute. Having shown that R.C. §3901.23(B) does not directly

apply, the Plaintiffs have failed to meet their burden. The Defendant responded to the Plaintiffs

`makes no sense' allegation by again reminding the undersigned that the Plaintiffs cannot point to

one statute that conflicts with the rule. Defendant asserted that the Plaintiffs' arguments are

political in nature. Defendant argued that the Plaintiffs can fix the perceived problem by going to

the General Assembly to change the statute. The Defendant asserted that until that time this Court

must follow the current law and hold that the rule does not conflict with any specific code.


The next assertion made by the Plaintiffs was their belief that the rule conflicted with the

Prohibited Person' thrust of R.C. §3953.21(B). Plaintiffs asserted that the clear language of the

code indicated a desire by the General Assembly to keep certain individuals or entities from acting

as an agent for a title insurance company. Yet the Defendant's rule allows those types of entitles

to become part owners of agencies. The Plaintiff asserted that the Defendant's rule tries to create

an unwarranted difference between ownership participation and the participation of prohibited

persons as defined in the statute. Plaintiffs claimed that the rule changed the definition of the term

`subsidiary' as found in R.C. §3953.21(B).

Plaintiffs asserted in their Memorandum Contra to the Defendant's Motion for Summary

Judgment that the term subsidiary is not defined in Chapter 3952. They then use a definition found

in R.C. §3901.32(F). That language is:

"Subsidiary" of a specified person is an affiliate controlled by such person, directlyor indirectly, through one or more intermediaries.

The Plaintiffs then turned to an online Merriam-Webster dictionary for their definition of affiliate.

Based upon Plaintiffs' logic, to be an affiliate is to be a subsidiary. As already pointed out R.C.

§3901.32 limits itself to §§ 3901.32 to 3901.37 of the Revised Code making the definition less

authoritative.

The Plaintiffs also asserted in the pleadings that in 2000 there was an attempt to take out

the or any subsidiaries' from the body of R.C. 3953.21(B) and that that effort never became law.

The Plaintiffs then argued that the fact that the effort failed supported their arguments against any

ownership interest being appropriate. But that argument can be turned by noting that there has

never been any effort by the General Assembly to insert the term affiliate into the code. It is clear

that affiliate is not in the code section. Had the General Assembly wanted to include that word it


could have done so. The undersigned rejects the Plaintiffs attempt to define affiliate as

interchangeable with the term subsidiary.

The Defendant responded to the Plaintiffs' arguments by stating that nothing in the code

stops insurance agencies from selling an equity interest in their business to others. The act of

selling an interest is legal. That is true even if the 'other' is not a licensed agent, so long as a

licensed agent has the ultimate authority to make decision about the business. O.A.C. §3901-7-04

was created, or so the Defendant argued, to 'clarify when an agency's corporate structure may run

afoul of the Revised Code's prohibition on excessive outside interference in the business of title

insurance.' (Defendant's MSJ at pages 2 — 3) The Defendant also reminded the Court that the rule

indicated a presumption of control at 50%, yet control could be shown to be at a lower amount

with the correct facts.

Furthermore, the 50% level contained in the rule is just a red flag that would trigger

regulatory scrutiny. At that point there would be a presumption that the corporate structure

violated the code. The rule does not establish that it is okay for a prohibited person to control the

agency if said individual only has 5% interest. It merely provides a clear shift in the burden of

proof should anyone, including the Plaintiffs or the Defendant, assert that a prohibited person is

controlling the business, and therefore, acting as an agent for a title insurance company.

Defendant rightfully pointed out that Plaintiffs' pleadings seem to mainly take issue with

the language in the rule dealing with the number 50. Had the Defendant picked 10, as asserted by

the Plaintiffs, then the rest of the issues concerning who would be able to own an equity share in a

title agency would not have even been an issue. Defendant also has pointed out time and time

again that there is no prohibition in the Revised Code that would stop an entity noted in R.C.

§3953.21(B) from owning an interest in a corporation engaged in the business of a title agency.


Page I 1

Defendant argued that the language of the rule does not redefine the term subsidiaries but provides

guidance as to what constitutes control.

During the oral argument the Plaintiffs made a more direct statement. In effect, the

Plaintiffs argued that the language of R.C. §3953.21(B) must be read to completely restrict any

ownership by a ' bank, trust company, bank and trust company, or other lending institution,

mortgage service, brokerage, mortgage guaranty company, escrow company, real estate company

or any subsidiaries thereof . . .' Thus it was the position of the Plaintiffs that .001% was too much

ownership and any rule that provided for any ownership exceeded the Defendant's rule making

authority.

The Defendant responded by again asserting that the language of the code contained 'be

permitted to act as an agent for a title insurance company.' The rule is not allowing any entity

named in R.C. §3953.21(B) to become an agent. Therefore, it does not conflict with the code.

Furthermore there is no probation found in the statute that would keep a 'bank, trust company,

bank and trust company, or other lending institution, mortgage service, brokerage, mortgage

guaranty company, escrow company, real estate company or any subsidiaries thereof . . .' from

owning stock in a company that is engaged the business of a title agency. All that OAC §3901-7-

04 is, argued the Defendant, was an attempt to make sure that ownership did/does not become

control. Defendant argued that the rule was/is and appropriate exercise of her authority to clarify

the issue of the corporate structure of a title agency. For with control, the 'precluded person'

would/could then be in effect an 'agent for a title insurance company' and that would be in

violation of R.C. §3953.21(B).

The Plaintiffs asserted that Bulletin 95-3, issued on August 1, 1995 clearly showed that

stock dividends are a 'valuable thing'. Hence, it is wrong for dividends to be paid to owners of


stock in title insurance agencies when they are prohibited by R.C. §3953.21(B) from acting as an

agent. The Plaintiffs saw the payment of dividends as as an inducement to insurance' as noted in

Bulletin 95-3.

In further support of their arguments the Plaintiffs pointed to the following language from

R.C. §3953.26:

§ 3953.26. Payments for inducement of businessNo title insurance company and no title insurance agent shall pay or give [to] anyapplicant for insurance, or to any person, firm, or corporation who is acting asagent, representative, attorney, or employee of the owner, lessee, mortgagee, or ofthe prospective owner, lessee, or mortgagee of the real property or any interesttherein, either directly or indirectly, any commission or any part of its fees orcharges, or any other consideration or valuable thing, as an inducement for, oras compensation for any title insurance business. . . . Effective Date: 12-12-1967

Plaintiffs asserted that if the parties prohibited by R.C. §3953.21(B) were to receive any dividends,

then that would violate R.C. §3953.26. Therefore, since OAC §3901-7-04 allows some ownership

interest in a title agency, ergo the Defendant has allowed by rule what it is denied by statute.

The Defendant felt that Bulletin 95-3 had nothing to do with the issues at hand. The

Defendant asserted that Bulletin 95-3 spoke to the marketing of insurance and methods to make

sales that would treat one potential policy holder different than the rest. Furthermore, the

Defendant argued that the Bulletin has no binding authority on the Court or the Defendant. The

Defendant stated: 'The opinion of a former Superintendent of Insurance is not afforded any special

weight. The opinion of the current Superintendent, however, is entitled to judicial deference."

(Defendant's Memorandum in Opposition at page 4) The Defendant cited Maitland v. Ford Motor

Co., 2004-Ohio-5717 to establish the level of deference that is required. The undersigned holds

that Plaintiffs reliance on Bulletin 95-3 and R.C. §3953.26 is misguided.


What value the Bulletin has/had is limited to marketing techniques and cannot be

extrapolated to hold that the possibility of the payment of uniform dividends, not specifically tied

to one insurance transaction, would keep a 'prohibited person' from owning stock in a title agency.

R.C. §3953.26 also speaks to the specific quid pro quo associated with insurance sales not

contemplated within a corporate dividend. (But if the dividend was structured in that fashion; i.e.,

to individually reward a stockholder for the placement of a policy, the dividend would violate R.C.

§3953.26. Yet that is not the issue before this Court.)

It is clear to the undersigned that R.C.§3953.21 precludes bank, trust company, bank and

trust company, or other lending institution, mortgage service, brokerage, mortgage guaranty

company, escrow company, real estate company or any subsidiaries thereof . . from acting as an

agent for a title insurance company. The language does not preclude those same entities from

having an ownership interest in a company engaged in the work of a title insurance agency. The

language of the statute does not speak to 'affiliates' for if it did, the arguments of the Plaintiffs

would have much more weight.

During the Oral argument, Plaintiffs pointed to OAC §3901-7-04(C)(5) to show that the

rule has clearly exceeded the Defendant's authority. Please note the following language from the

rule:

(5) "Prohibited person" means a person prohibited from acting as an agent for a titleinsurance company pursuant to division (B) of section 3953.21 of the RevisedCode, and includes builders and developers. (Emphasis added)

Yet R.C. §3953.21(B) does not reflect any prohibition against builders and developers. Plaintiffs

asserted that that showed that the Defendant knew that she was exceeding her authority in

promulgating the rule. The Plaintiffs argued that said language showed the Defendant's


willingness not to be constrained by the language of the statute. The undersigned refuses to draw

that conclusion.

In any event, the language of OAC §3901-7-04(C)(5) is not the issue before this Court.

Nor does it appear that the Plaintiffs would have standing to assert that argument for the benefit of

`builders and developers'. Furthermore the rule contains a standard severability clause that would

keep the undersigned from tossing out the baby with the bath water.

In her Motion for Summary Judgment, the Defendant asserted that the Real Estate

Settlement Procedures Act (RESPA) allows corporate ownership in title insurance agencies. That

statement was uncontested by the Plaintiffs. It was also supported by the findings in Carter infra,

a case cited as authority by the Plaintiffs. Hence, if the Defendant was to agree with the Plaintiffs'

position, she would be in violation of the federal rules. Defendant asserted, based on RESPA, that

she lacked the authority to do what the Plaintiffs want; i.e., preclude or heavily restrict the

corporate structure of title agencies.

The Defendant also asserted that this is just an attempt by the Plaintiffs to keep additional

competition from occurring. The suit was filed to try and limit any new providers from entering

the market that might be able to better compete with the stand alone title agencies. As such, the

Defendant asserted that the arguments of the Plaintiffs should be viewed in that light. Defendant

asserted that this was just an attempt to wall off the industry from competition. Defendant asked

the Court to look behind the curtain of Plaintiffs' arguments to see the scared industry trying to

defend its turf.

Plaintiffs', in their supplemental filing and at oral argument, asserted that the Federal Court

has found RESPA to be unconstitutional due to vagueness. In support Plaintiffs cited to Carter, et


al., v. Welles-Bowen Reality, Inc., et al, 3:05 CV 7426 United States District Court, Northern

District of Ohio, Western Division (Toledo).1

In Carter the defendants were tile agencies that had been created between realtor firms and

a title insurer. The realtors in conjunction with a title insurer, created a corporate entity that gave

the title insurer 50.1% ownership interest while the realtors' subsidiary corporation owned 49.9%.

The evidence in Carter indicated that over 90% of the new agencies' revenue came from the

realtors' firms. The defendants in Carter argued that the business fell into the exceptions found in

RESPA.

The Carter defendants argued that they meet the exceptions noted for an 'affiliated

business arrangement.' The Carter defendants disclosed the ownership arrangement to the

consumer; they did not require the consumer to use the defendant; and the compensation that the

realtors received where based purely on their respective ownership interest in the agency. The

Carter plaintiffs claimed that the court needed to look past RESPA and to the HUD Policy

Statement 1996-2, 61 Fed. Reg. 29,258, 20 C.F.R. Pt. 3500. Plaintiffs argued that the Carter court

had to address the ten factors noted in that policy statement to see if the defendants agencies were

just 'shams' to serve as conduits for kickbacks.

The HUD Policy Statement reads as follows:

The Department will consider the following factors and will weigh them in light ofthe specific facts in determining whether an entity is a bona fide provider:(1) Does the new entity have sufficient initial capital and net worth, typical in theindustry, to conduct the settlement service business for which it was created? Or isit undercapitalized to do the work it purports to provide?(2) Is the new entity staffed with its own employees to perform the services itprovides? Or does the new entity have "loaned" employees of one of the parentproviders?

Consolidated with 3:09 CV 400.


(3) Does the new entity manage its own business affairs? Or is an entity that helpedcreate the new entity running the new entity for the parent provider making thereferrals?(4) Does the new entity have an office for business which is separate from one ofthe parent providers? If the new entity is located at the same business address asone of the parent providers, does the new entity pay a general market value rent forthe facilities actually furnished?(5) Is the new entity providing substantial services, i.e., the essential functions ofthe real estate settlement service, for which the entity receives a fee? Does it incurthe risks and receive the rewards of any comparable enterprise operating in themarket place?(6) Does the new entity perform all of the substantial services itself? Or does itcontract out part of the work? If so, how much of the work is contracted out?(7) If the new entity contracts out some of its essential functions, does it contractservices from an independent third party? Or are the services contracted from aparent, affiliated provider or an entity that helped create the controlled entity? If thenew entity contracts out work to a parent, affiliated provider or an entity that helpedcreate it, does the new entity provide any functions that are of value to thesettlement process?(8) If the new entity contracts out work to another party, is the party performing anycontracted services receiving a payment for services or facilities provided that bearsa reasonable relationship to the value of the services or goods received? Or is thecontractor providing services or goods at a charge such that the new entity isreceiving a "thing of value" for referring settlement service business to the partyperforming the service?(9) Is the new entity actively competing in the market place for business? Does thenew entity receive or attempt to obtain business from settlement service providersother than one of the settlement service providers that created the new entity?(10) Is the new entity sending business exclusively to one of the settlement serviceproviders that created it (such as the title application for a title policy to a titleinsurance underwriter or a loan package to a lender)? Or does the new entity sendbusiness to a number of entities, which may include one of the providers thatcreated it?

The undersigned notes that almost the same language is contained within O.A.C. §3901-7-04.

The Carter defendants asserted that the HUD Policy Statement deserved no deference

based upon Chevron USA., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 at 842 (1984).

The Carter defendants also asserted that the 10 factor test in the HUD policy was

unconstitutionally vague. The Carter court addressed the vagueness claim.


The Carter court found that RESPA had potential criminal sanctions so "a relatively strict

[vagueness] test is warranted." (Citing Springfield Armory, Inc. V City of Columbus, 29 F.3d 250

at 252 (6 th Cir. 1993)) The Carter court held that the factors in the HUD policy used vague terms

reminiscent of language that had be struck down in the past. Terms like 'sufficient', 'substantial'

`reasonable', and 'actively competes'. The HUD policy gave no guidance as to what an entity

must do to avoid the potential criminal sanction. The Carter court also took issue with the fact that

all of the factors would be 'considered together'. The Carter court was left to question if one factor

is/was more important than another or were they all equal?

Based on those issues the Carter court concluded that the HUD policy language was

unconstitutionally vague. The Carter court then turned to the actual language of the RESPA

statute and determined that, pursuant to the statute, the defendants had disclosed the ownership

arrangement; they did not require the consumer to use the defendant, and the compensation that the

realtors received where based purely on their respective ownership interest in the agency. The

Carter court held that the defendants, therefore, had not violated the anti-kickback or unearned fee

provisions of RESPA.

Plaintiffs' reliance on Carter creates an interesting paradox. The undersigned understands

that the Plaintiffs want to stop all business arraignments like the one noted in Carter. Plaintiffs

feel that O.A.C. §3901-7-04 has allowed for those entities to be sanctioned by the state. Hence, the

Plaintiffs have aggressively argued that O.A.C. §3901-7-04 needs to be stricken to secure their

goal. Yet, the logic in Carter shows that once the rule is stricken for vagueness, then entities are

only going to be limited by the language contained in the statute. The language of R.C.

§3953.21(B) does not stop nor outlaw the creation of affiliated business arrangement just like the

ones noted in Carter. So if the undersigned was to determine that O.A.C. §3901-7-04 was


unconstitutional due the reasoning in Carter, there will/would be no real impediment left to the

creation of affiliated business leading to the alleged harm that the Plaintiffs are fighting to avoid.

Also, the Carter court only found that the factors in the HUD policy used by RESPA was

unconstitutionally vague. That would remove section (E) of O.A.C. §3901-7-04. Even if that

language was stricken, there would still be no conflict between O.A.C. §3901-7-04(C)(2) and any

other relevant parts of Chapter 39 of the Revised Code. As noted earlier the rule would stop a

prohibited person from using his/her/its equity share if it was being used to circumvent R.C.

§3953.21(B).

The Plaintiffs filed their Motion for Summary Judgment on April 30, 2010 and the

Defendants timely responded. On May 21, 2010 the Plaintiffs filed their Reply. The Plaintiffs did

not assert within their April 30, 2010 filing any constitutional issues. Their arguments were

concentrated on their claims that the Defendant exceeded her rulemaking authority.

On July 6, 2010 the Plaintiffs filed a request to file supplemental authority and a request for

an Oral argument. The Defendants responded by asserting that the Oral argument should not be

granted. The Plaintiffs' July 6 filing did more than just attach the supplemental authority. In said

document the Plaintiffs asserted arguments stemming from the supplemental authority that raised,

for the first time, constitutional questions. The Plaintiffs raised the same constitutional question

again at the Oral argument. It would be fundamentally unfair to make a ruling in regard to that

argument given the fact that the Defendant has never been given the opportunity to brief the issue.

Hence, the undersigned will not address the constitutionality of the rule because it is not

appropriately before the Court.

Defendant's Motion for Summary Judgment pointed out that a number of Plaintiffs claims;

i.e., accounting and a request for injunctive relief, were unsupported by the law. There is no legal


justification for the accounting claim and, should this Court hold that there was no error in the rule,

then a request for injunctive relief must also be denied. The undersigned has reviewed the 37 page

complaint filed by the Plaintiffs. One of the counts raised by the Plaintiffs is in the nature of a

mandamus action. The Plaintiffs' Motion for Summary Judgment has only addressed their claims

for a declaratory judgment. The Plaintiffs did not seek mandamus relief within their Motion for.

Summary Judgment or directly within their Complaint but the allegation of Count 6 would seem to

be sufficient to place the Defendant on notice of a mandamus claim.

In determining the actual claim as found in Count 6 of the complaint, the undersigned must

look to the nature of the claim asserted and not to the mere title given to the count by the Plaintiffs.

See, Hunter v. Shenango Furnace Co., (1988) 38 Ohio St.3d 235, at 237. From a review of count

6, mandamus has been pled. Count 6, paragraph 96 asserted; "Upon information and belief, the

ODI Director has not applied and refuses to apply OAC 3901-7-04(E) against existing title

insurance agencies". If the rule is upheld then the Plaintiffs would have the ability to maintain a

mandamus action to attempt to prove the elements of that claim; i.e., seek enforcement of the

rile/statute. Therefore the Defendant's request that the entire complaint be dismissed cannot be

granted.

Based upon the arguments properly before this Court, it is the decision of the undersigned

that the rule is a reasonable construction of the statutory scheme and the Defendant did not exceed

her authority in promulgating it. Therefore all but

Plaintiffs Request for and Oral Argument.

As noted earlier, the Plaintiffs filed a request for an oral argument within their

supplemental authority filed on July 6, 2010. Defendant filed a memorandum in opposition. The

Court filed its Order of Reference and Notice of Hearing on August 23, 2010. Having referred the


matter to the undersigned for hearing, and, having conducted said Oral hearing on September 9,

2010, the undersigned finds Plaintiffs request to be MOOT.

DECISION

Ohio Administrative Code §3901-7-04(C)(2) is within the Defendant's statutory grant of

authority, it is reasonable, and it does not expressly conflict with any statute on the same subject.

Plaintiffs' Motion for Summary Judgment is DENIED.

Defendant's Motion for Summary Judgment is GRANTED in part. Count 6 of the

Plaintiffs' complaint remains pending; all other counts are DISMISSED.

Plaintiffs' request for an oral argument as contained within their July 6, 2010 filing is

MOOT.

Counsel for the Defendant SHALL prepare and submit a Judgment Entry pursuant to Local

Rule 25.01.

A PARTY SHALL NOT ASSIGN AS ERROR ON APPEAL THE COURT'S ADOPTIONOF ANY FACTUAL FINDING OR LEGAL CONCLUSION, WHETHER OR NOTSPECIFICALLY DESIGNATED AS A FINDING OF FACT OR CONCLUSION OF LAWUNDER CIV.R. 53(D)(3)(a)(ii), UNLESS THE PARTY TIMELY AND SPECIFICALLYOBJECTS TO THAT FACTUAL FINDING OR LEG NC USION AS REQUIREDBY CIV.R. 53(D)(3)(b).

Copies to:

Robert Holman Esq.P.O. Box 46390Cleveland, Ohio 44146

AndE. Bruce Hadden, Esq.132 Northwoods BoulevardColumbus, Ohio 43235

AndGregory W. Happ, Esq.238 W. Liberty StreetMedina, Ohio 44256


Counsel for Plaintiffs

W. Scott Myers, Esq.Sean Culley, Esq.30 East Broad Street, 26th FloorColumbus, Ohio 43215

Counsel for Defendant


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