In a per curiam Opinion issued this morning, the Ohio Supreme Court ruled that the beneficiaries of life insurance policies purchased by Roy Dillabaugh, who operated a Ponzi scheme, did not have standing to appeal a trial court’s order which ruled that that the Director of the Ohio Department of Commerce ("the Director") was entitled to seek recovery of the insurance premiums paid for life insurance policies, but not the entire amount paid out under the policy. Significantly, the Supreme Court vacated the portion of the ruling of an intermediate appellate court that the Director lacked the authority to sue third-parties, such as the beneficiaries of the policy, and that the Director lacked the authority to seek an injunction against them to prevent them from disposing of the proceeds of the insurance policy. In short, because the trial court had not ordered any relief imposed on the beneficiaries, they lacked standing to appeal and therefore the subsequent intermediate decision never should have occurred and was vacated.
The Director had alleged that from 1994 to 2007, Mr. Dillabaugh sold approximately $12 million in securities to 146 investors primarily located in Ohio and Indiana and told those investors that the funds were invested in legitimate business activities and were guaranteed, while really operating a Ponzi scheme and using the funds to, among other things, pay his own expenditures, which included premium payments on dozens of life insurance policies. Mr. Dillabaugh was the insured under those policies and his wife, son and secretary were the beneficiaries.
In June 2008, the Director filed suit against the Dillabaugh Group and the estate of Mr. Dillabaugh, claiming violations of the Ohio Securities Act and seeking to recover the proceeds from the Ponzi scheme. The Director also named the wife, son and secretary as necessary parties and obtained a TRO to prevent the dispersal of any of the proceeds of the insurance policies. The Director did not claim that the wife, son and secretary violated the law.
The trial court ultimately concluded that the Director and an appointed Receiver were creditors of the Dillabaugh Group and the estate, and were entitled to seek recovery of the insurance premiums paid for the policies, but not the entire amount paid out under the policies.
The Director appealed and Mr. Dillabaugh’s wife and secretary cross-appealed. Mrs. Dillabaugh and Ms. Long (the secretary) argued that the Director may seek remedies against violators of the Ohio Securities Act only, and because they did not violate the Act, the Director could not recover funds from them. The Court of Appeals agreed, but noted that the Director could seek the appointment of a receiver, who would then have the authority to sue to recover the proceeds from the violation of the Ohio Securities Act.
As discussed here, the Court of Appeals held that "[b]ecause we have concluded that the Director lacked the authority to sue third-parties, such as Mrs. Dillabaugh and Ms. Long, … the Director necessarily lacked the authority to seek a temporary restraining order and a preliminary injunction against them to prevent them from disposing of the proceeds of the insurance policy." The Court of Appeals held that the appointed Receiver had the authority to "marshal and preserve assets," but had not yet done so. Therefore, the issue of whether the Receiver could recover the full amount was not ripe for determination, and "[i]f the receiver wishes to pursue all of the proceeds of the life insurance policies …, he may attempt to do so in his own action, and the trial court may address [arguments regarding the issue], if raised, at that time."
Before the Supreme Court, the Director argued:
The [Trial Court’s] Final Order did not "aggrieve" the Recipients, nor did it create a controversy as to the Division’s power to seek relief against them, because it did not impose any injunctive relief upon them or affect them in any way.
On page one, the trial court noted that the Division "requests a restraining order" against the Recipients regarding insurance proceeds, but it did not state that it was imposing such an order. … [I]n a paragraph straddling pages two and three, the trial court made several findings regarding the receiver’s future power to pursue the funds held by the Recipients, but that passage does not even mention the Division. Id. at 2-3. … Moreover, only the Division had sought relief at that point; the receiver’s role was still in the future.
The Supreme Court agreed, ruling that
To have appellate standing, a party must be aggrieved by the final order appealed from. [citations omitted] … [Mrs. Dillabaugh and Ms. Long], the cross-appellants below, did not have standing to appeal the decision of the trial court. Accordingly, the portion of the court of appeals decision concerning the powers of the Division of Securities is vacated.
Although the decision turns on the procedural issue of standing, the result removes what Professor Barbara Black had called "a significant obstacle in the Division’s power to act quickly to protect investors," by vacating that portion of the Court of Appeals ruling regarding the powers of the Director.
