Sherman v. River Oaks Office Plaza, Ltd.

Spellacy, Judge. Plaintiffs-appellants Michael Sherman and Alexander Hahn (“appellants”) appeal the entry of summary judgment in favor of defendants-appellees River Oaks Office Plaza, Ltd. and First Equities Associates-KH (“appellees”). Appellants raise two assignments of error: “I. The trial court erred when it granted summary judgment to defendantsappellees finding that defendants-appellees’ violation of [R.C.] 1707.03(Q) did not materially affect the protection contemplated therein where plaintiffs-appellants were materially and actually affected by defendants-appellees’ conduct. “II. The trial court erred when it denied summary judgment to plaintiffs-appellants ‘due to the fact that’ the Ohio Division of Securities stamped defendants-appellees securities filing as ‘complete,’ thereby, denying the remedy of rescission to plaintiffs-appellants pursuant to [R.C.] 1707.43.” We find the first assignment of error has merit and the second assignment of error lacks merit. As a result, we reverse the judgment of the trial court and remand the cause for further proceedings. I After selling securities to appellants, appellees attempted to exempt them from regulation under R.C. 1707.03(Q), which requires the filing of a Form 3-Q with the Ohio Department of Commerce, Division of Securities (“Division”) within *452 sixty days of the sale of a security. The attorneys for appellees, however, failed to file a Form 3-Q until sixty-nine days after the sale to appellant Hahn and seventy-one days after the sale to appellant Sherman. Appellants brought this action seeking rescission of the sale. Both appellants and appellees filed motions for summary judgment. The trial court denied appellant’s motion and granted appellee’s motion, finding that “ * * * the slight delay in filing for the exemption provided for in R.C. 1707.03(Q) did not materially affect the protection contemplated by the provision. The violation of R.C. 1707.03(Q)(4) did not materially affect the protection provided by the statute due to the fact that the [Division] affirmed the legitimacy of the securities * * * they were stamped as ‘complete’ and ‘accepted.’ ” 1 II In their first assignment of error, appellants contend the trial court erred when it found the late filing of the Forms 3-Q did not materially affect the protection contemplated by R.C. 1707.44(C)(1) and granted appellees’ motion for summary judgment. Under R.C. 1707.43, purchasers of securities may void sales that violate R.C. Chapter 1707 “unless the court determines that the violation did not materially affect the protection contemplated by the violated provision.” R.C. 1707.44 provides, in pertinent part: “(C) No person shall knowingly and intentionally sell, cause to be sold, offer for sale, or cause to be offered for sale, any security which comes under any of the following descriptions: “(1) Is not * * * the subject matter of one of the transactions exempted in section * * * 1707.03 * * * of the Revised Code * * As noted above, to exempt a security under R.C. 1707.03(Q). a Form 3-Q must be filed within sixty days of the sale. The Ohio Supreme Court addressed the issue of materiality in Pencheff v. Adams (1983), 5 Ohio St.3d 153, 5 OBR 318, 449 N.E.2d 1277, syllabus, holding that “[flailure to comply with R.C. 1707.44(C)(1) materially affects the protection contemplated by that provision and entitles a purchaser of unregistered securities to the relief provided under R.C. 1707.43.” See, also, Callahan v. Class One, Inc. (1991), 58 Ohio St.3d 76, 567 N.E.2d 1036, syllabus. The clear import of Pencheff *453 is that any violation of R.C. 1707.44(C)(1) materially affects the protection contemplated by that provision. Appellees argue that we are bound by Obenauf v. CIDCO Investment Services, Inc. (1990), 54 Ohio App.3d 131, 133-134, 561 N.E.2d 1070, 1072-1074, where we stated that a violation of R.C. 1707.44(C)(1) may be immaterial if a filing substantially complies with R.C. Chapter 1707. This statement is dictum. Obenauf held no violation of R.C. 1707.44(C)(1) occurred. Id. at 134, 561 N.E.2d at 1073-1074. A ruling on whether a violation would materially affect the protection contemplated by that provision, therefore, would have been premature. Further, even if this had not been dictum, we are bound by the Supreme Court’s rulings in Pencheff and Callahan. Accordingly, appellant’s first assignment of error is well taken. Ill In their second assignment of error, appellants contend the trial court erred when, in denying their motion for summary judgment, it found the Division cured the late filing of the Forms 3-Q stamping the filing “complete” and denied their motion for summary judgment. We agree that the Division could not cure the late fifing of the Forms 3-Q. R.C. Chapter 1707 does not give the Division this authority. We realize Obenauf relied on the Division’s accepting and stamping “complete” on the Form 3-Q in that case. This portion of Obenauf, however, is dictum. Additionally, the Division, as amicus curiae, argues the term “complete” merely signifies a Form 3-Q has been entered into its computer system. Although we agree the Forms 3-Q were filed late, we find the trial court did not err when it denied appellants’ motion for summary judgment. Civ.R. 56 governs our review. In Temple v. Wean United, Inc. (1977), 50 Ohio St.2d 317, 327, 4 O.O.3d 466, 472, 364 N.E.2d 267, 274, the court stated that: “Civ.R. 56(C) specifically provides that before summary judgment may be granted, it must be determined that: (1) No genuine issue as to any material fact remains to be litigated; (2) the moving party is entitled to judgment as a matter of law; and (3) it appears from the evidence that reasonable minds can come to but one conclusion, and viewing such evidence most strongly in favor of the party against whom the motion for summary judgment is made, that conclusion is adverse to that party.” R.C. 1707.44(C)(1) provides, in pertinent part, “[n]o person shall knowingly and intentionally sell * * * ” nonexempt securities. In Obenauf we recognized the necessity of showing that a party acted knowingly and intentionally to establish a *454 violation of R.C. 1707.44(C)(1). See, also, Plantation Housing Partners, Ltd. v. Lindsey (Mar. 14, 1991), Cuyahoga App. No. 58196, unreported, at 7, 1991 WL 34726 (knowingly and intentionally essentiál elements); Jelm v. Galan (Mar. 7, 1991), Cuyahoga App. No. 58093, unreported, at 13, 1991 WL 30266 (actual knowledge considered necessary element). Callahan and Pencheff do not, as appellants argue, eliminate the elements of knowingly and intentionally. These decisions presuppose a violation of R.C. 1707.44(C)(1) and address whether such a violation would, under R.C. 1707.43, materially affect the protection contemplated by R.C. 1707.44(C)(1). Reviewing the evidence, as required by Civ.R. 56, we find that a genuine issue of fact exists concerning whether appellees sold the securities knowing and intending that they would not be exempt. Accordingly, appellants’ second assignment of error is not well taken. The judgment of the trial court is reversed and the cause is remanded. Judgment reversed and cause remanded. Dyke, C.J., concurs. Harper, J., concurs in part and dissents in part. Footnotes [1] The trial court improperly identifies R.C. 1707.03(Q)(4) as the violated provision. The issue before the trial court was whether R.C. 1707.44(C)(1) had been violated by appellees' failure to comply with R.C. 1707.03(Q)(4).