Professional Documents
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)
OHIO ASSOCIATION OF ) CASE NO. 09 CV6663
INDEPENDENT TITLE AGENTS, et )
al., ) JUDGE HORTON
)
Plaintiffs, )
) PLAINTIFFS’ MEMORANDUM IN
vs. ) OPPOSITION TO DEFENDANT’S
) MOTION FOR SUMMARY
) JUDGMENT
MARY JO HUDSON, DIRECTOR, )
OHIO DEPARTMENT OF )
INSURANCE, )
)
Defendant. )
Now comes the Plaintiffs, the Ohio Association of Independent Title Agents
(OAITA) and Eagle Land Title Agency, Inc. (“Eagle Land Title”) by and through their
undersigned counsel of record and pursuant to Local Rule 12.01 of the Local Rules of
Practice for the Franklin County Court of Common Pleas hereby submit their Response
Respectfully submitted,
______________________________
Robert B. Holman, Esq. (0072480)
HOLMAN, FRANK & MCDONALD
P.O. Box 46390
Cleveland, Ohio 44146
Phone: (440) 232-9911
Fax: (440) 439-2308
E-Mail: rholman@hfm-law.com
1
RESPONSE MEMORANDUM
I. INTRODUCTION
The ODI’s analysis in support of its Motion for Summary Judgment misses a
critical fact. The Revised Code already contains an express provision which
unequivocally bars prohibited parties and their subsidiaries from acting as an agent of a
OAC 3091-7-04 and creating a new definition for the term “control,” the ODI has
attempted to expand and change the legislative definition of the term “subsidiary” within
O.R.C. § 3953.21(B) to permit prohibited persons and their subsidiaries to own financial
The term “subsidiary” is not defined in Chapter 3953 of the Revised Code. But a
term “affiliate” is also not defined in Chapter 3953 of the Revised Code. But the
ordinary and plain meaning of the term “affiliate” is “an affiliated person or
organization.”2 One certain way companies affiliate with another is through stock
The ODI has no answer for this conclusion. All it can point to is OAC 3901-7-04
which attempts to rewrite O.R.C. § 3953.21(B) and create permission for prohibited
persons and their subsidiaries where none was ever intended. The purpose of OAC 3901-
7-04 as stated in the rule is to “establish ownership and licensing standards for title
1
See O.R.C. § 3901.32(F).
2
http://www.merriam-webster.com/dictionary/affiliate (visited May 26, 2010)
2
insurance agents and agencies in accordance with division (B) of section 3953.21 of the
Revised Code, which prohibits certain persons from acting as agents for a title insurance
company.”3
Instead of defining what actions the ODI considers to be “acting as a title agent”
through an administrative rule, the ODI promulgated OAC 3901-7-4 to define “control,”
a term that does not appear in O.R.C. § 3953.21(B), and thereby created a means to allow
prohibited parties and their subsidiaries to act as agents of title insurance companies
and engaging in the business of title insurance. The ODI cannot create authorization
where the Ohio General Assembly mandated complete prohibition by use of the term
“subsidiary.”
The arguments contained in the ODI’s Motion for Summary Judgment belie the
stark reality of the title insurance industry and its direct impact on Ohio’s title insurance
owned controlled business arrangements4 (“CBAs”), eliminate competition and raise the
overall cost of insurance for title insurance consumers.5 Most importantly, these types of
business arrangements create inexorable conflicts of interest between the CBA and the
consumer, who in many cases is unaware of the fact that their bank, mortgage company,
3
OAC 3901-7-04(A).
4
The term controlled business arrangements includes title insurance agencies owned directly by prohibited
persons and/or controlled by, either directly or indirectly, a prohibited person.
5
Jack Guttentag, “Real Estate Settlement Services Take Bite Out of Borrowers,” Inman News, September
6, 2005; see also, The Pricing and Marketing of Insurance: A Report of the Department of Justice to the
Task Group on Antitrust Immunities, January 1977, Pages 250-274; “Chapter XII The Title Assurance and
Conveyance Industries” of Real Estate Closing Costs, RESPA, Section 14a, Volume II Settlement
Performance Evaluation prepared by Peat, Marwick, Mitchell and Co. for the Department of Housing and
Urban Development, October 1980; State of California Department of Insurance Bulletin 80-12, December
24, 1980, Subject: Insurance Code Section 12404 - Unlawful Rebates; Title Insurance Advisory Committee
Final Report to the State Board of Insurance, September 1986; Nelson Lipshutz, The Regulatory
Economics of Title Insurance, Praeger Press, Westport, CT, 1994, page 5;
3
real estate firm, referred the consumer’s title insurance business based not upon the
interests of the consumer, but upon the financial interests of the CBA.
The act of giving a kickback or an inducement for the referral of title insurance
business is illegal.6 Ohio’s General Assembly recognized this fact over forty-three (43)
years ago and instituted broad prohibitions to preserve the title insurance industry from
its referral sources (i.e. banks, mortgage companies, real estate firms and any subsidiaries
thereof). For example, the Revised Code contains numerous explicit provisions
companies, real estate firms and any subsidiaries thereof) from entry into the business of
title insurance, including: O.R.C. § 3901.21(E) (making it an unfair trade practice for a
third party, including a prohibited person, to issue stock in an insurance entity promising
for any person, including a prohibited person, to give or receive stock as inducement for
insurance business); O.R.C. § 3953.25 (making it unlawful for any person, including a
(making it unlawful for any person, including a prohibited person, to give any thing of
value as an inducement for title insurance business); and O.R.C. § 3953.21 (making it
unlawful for any unlicensed prohibited person to sell, urge or solicit on behalf of a title
insurance company).
Despite these broad prohibitions, the ODI has chartered a new and different
course away from the mandatory prohibitions contained in the Revised Code. In
particular, the ODI promulgated OAC 3901-7-04 which, according to its stated purpose,
6
O.R.C. § 3953.26.
4
was meant to clarify only the prohibitions contained in O.R.C. § 3953.21.7 Under OAC
3901-7-04, the ODI will not license a prohibited person to become a licensed title
insurance agent or possess a majority interest in a title insurance agency, but it will
insurance agency so long as the prohibited person does not “control” the entity.8
The ODI Director possesses the authority to “adopt, amend, and rescind rules …
3901.041. However, the ODI Director’s authority in this regard is not absolute. The
Director may not create law, especially where the legislative intent is clear and
unambiguous.10 O.R.C. § 3953.21 is clear and unambiguous. OAC 3901-7-04 not only
While the rule creates new law with its presumption and definition of “control,”
nowhere within O.R.C. § 3953.21 is the word “control” ever used by the legislature.11 In
fact, the language contained in O.R.C. § 3953.21 sets the bar for prohibited person
participation at zero.12 The legislature was abundantly clear with the directive contained
in O.R.C. § 3953.21. No bank, mortgage company, real estate firm or any subsidiary
thereof can act as an agent of a title insurance company.13 (Emphasis added). There is no
7
OAC 3901-7-04.
8
Id.
9
O.R.C. § 3901.041.
10
If the administrative rule in question adds or subtracts from the legislative enactment, the rule is invalid
as it is in clear conflict with the statute. Hoffman v. State Med. Bd, supra at 378, 865 N.E.2d at 1261; citing
Cent. Ohio Joint Vocational School Dist. Bd. of Edn. v. Ohio Bur. of Emp. Servs., 21 Ohio St.3d 5, 487
N.E.2d 288 (1986).
11
O.R.C. § 3953.21.
12
Id.
13
Id.
5
persons and their subsidiaries from acting as an agent in the business of title insurance.
(Emphasis added).
The ODI questions whether there is or is not a provision in the Revised Code that
prohibits certain entities from being “silent” partners or minority shareholders in order to
make the case that the ODI can substitute its judgment for that of the legislature.14 The
question is moot. The legislature was clear. The legislature did not permit “control” of
would have explicitly said so in the statute. The legislature did not create a presumption
would have explicitly said so in the statute. The only thing the statute does is to bar
prohibited persons and their subsidiaries from access to the business of title insurance,
things that suggest a preference for the strenuous prohibition against prohibited person
How then did the presumption in favor of prohibited persons and their
subsidiaries in the business of title insurance and the definition of “control” suddenly
appear on the scene after over forty (40) years of non-existence? The answer is that the
subvert the statutory definition of “subsidiary,” the ODI has created a burden of proof
seemingly favoring prohibited person participation in title insurance agencies that never
14
Defendant’s Motion for Summary Judgment.
15
O.R.C. § 3953.01(B)(2) & (3).
6
existed in the statute and thereafter completely undermines its efficacy. As there is clear
conflict between the rule and the statute, OAC 3901-7-04 must be invalidated.
O.R.C. § 3953.21 expressly states that a prohibited person may not act as an agent
insurance agency.17 There is no such permissive language in the Revised Code. Instead,
The term “agent” is not defined in Chapter 3953 of the Revised Code.18 The ODI
points to the definition of “agent” found in O.R.C. § 3905.01(D) which states that an
“agent” is “any person that, in order to sell, solicit, or negotiate insurance, is required to
be licensed under the laws of this state … .”19 By virtue of the ODI’s own definition,
prohibited persons cannot sell, solicit, negotiate, steer, or direct title insurance business
for a title insurance company and they cannot be licensed.20 Yet, selling, soliciting,
negotiating, steering and directing title insurance business is precisely what a prohibited
person with a forty-nine percent (49%) interest or less does with a CBA.21
Normally, where a term is not defined in the statute, the term shall be given its
natural and legal meaning.22 Even assuming the common law definition of the term
16
O.R.C. § 3953.21(B).
17
OAC 3901-7-04; see also, Defendant’s Motion for Summary Judgment.
18
O.R.C. § 3953.01.
19
O.R.C. § 3905.01(D); see also, Exhibit D to Plaintiffs’ Motion for Summary Judgment.
20
O.R.C. § 3953.21(B).
21
See Exhibit A, attached to Plaintiffs’ Motion for Summary Judgment.
22
The term agent was not defined in the statute. The Ohio Supreme Court has reasoned that: “the term
‘agent’ should therefore be given its natural and legal meaning, that given it by the courts, and derived from
7
“agent,” it is impossible to imagine how the legislature’s language in O.R.C. § 3953.21
was anything other than a complete bar to the participation of prohibited persons in the
owning an interest in a title insurance agency, makes one an “agent” for purposes of
O.R.C. § 3953.21(B).23 Under the common law definition of “agent,” prohibited person
common sense application. The General Assembly sought to bar prohibited persons
from acting as an agent for a title insurance company -- whether soliciting, selling or
urging the use of a title insurance provider or under the common law definition of the
term “agent.” Either way the term “agent” is defined, the legislature intended to bar
prohibited persons from the business of title insurance, which is conducted through title
insurance companies by agents. In fact, the term “business of title insurance” is defined
to include the very things that a title insurance agency might do in the performance of its
services such as: “transacting, or proposing to transact, any phase of title insurance,
For the ODI to be correct in its assertion that O.R.C. § 3953.21 tacitly permits
would then have barred prohibited persons from acting as an agent of a title insurance
company under O.R.C. § 3953.21, but tacitly permitted those same prohibited persons to
the principles of the common law.” “In the absence of statutory definition, it includes a soliciting or other
agent, authorized to act ‘in respect to that branch of its business intrusted [Sic] to him.’” John Hancock
Mut. Life. Ins. Co. v. Luzio, 123 Ohio St. 616, 628, 176 N.E. 446 (1931) citing Mass. Life Ins. Co. v.
Eshelman, 30 Ohio St. 647 (1876).
23
Berge v. Columbus Community Cable Access (1999), 136 Ohio App.3d 281, 301, quoting Restatement of
the Law 2d, Agency (1958) 7, Section 1.
24
O.R.C. § 3953.01(B).
8
engage in the “business of title insurance” with the same statute. This position is
logically untenable. The legislature was clear in barring prohibited persons from acting
prohibited person participation in a title insurance agency and defines “control” to permit
The only reason the ODI sought to create OAC 3901-7-04 was to expand and add
previously licensed CBAs to continue doing business in Ohio. After all, in the fifteen
years since the ODI issued Bulletin 95-3, which stated that stock dividends and profit
CBAs had already been licensed by the ODI and were openly operating in Ohio. The
obvious obstacle posed by the “subsidiary” definition was no stranger to the ODI or to
In 2000, a few legislators in the Ohio Senate attempted to enact S.B. 281 which
contained a provision that would have removed the phrase “or any subsidiaries
thereof,” from Ohio Rev. Code § 3953.21(B); thereby eliminating the prohibition with
Proposed S.B. 281 never passed and never became law.26 O.R.C. § 3953.21(B) still
25
Ohio Rev. Code §3953.21(B) and S.B. 281, 123rd General Assembly (As Reported by S. Finance &
Financial Institutions).
26
Id.
27
O.R.C. § 3953.21(B).
9
On January 1, 2007, the ODI substituted itself for the work of the General
Assembly and emasculated the definition of the term “subsidiary” by promulgation and
enactment of OAC 3901-7-04. In reinventing Ohio law, the ODI created a new definition
of “control” with OAC 3901-7-04, but did not use the only insurance-based definition of
at ten percent (10%). Instead, the ODI created its own legal presumption of “control” at
fifty percent (50%).28 In response to this obvious difference, the ODI argues that the
companies and has “nothing to do with title insurance.”29 This response underscores the
ODI’s lack of understanding when it comes to the structure of CBAs and the
Insurance holding companies are defined as “two or more affiliated persons, one
insurance.”31 Based upon these definitions, the insurance holding company section,
CBAs and the title insurance industry. (Emphasis added). The ODI overlooked O.R.C. §
The ODI deflects from its selective interpretation of Ohio law by arguing that it
lacks the ability to interpret these statutes as the General Assembly intended because the
28
OAC 3901-7-04.
29
Defendant’s Response to Plaintiffs’ Motion for Summary Judgment.
30
O.R.C. § 3901.32(C).
31
O.R.C. § 3901.32(D).
10
statutes themselves do not refer specifically to title insurance.32 Simply put, the ODI
cannot “connect the dots” unless the line is drawn for them. The ODI’s argument is
prohibited person’s participation in a title insurance agency is prohibited. The ODI may
not like the administrative outcome of that fact, but under Ohio law, it has no other
choice but to view it that way. Since 1967, the prohibitive feature of the title insurance
Plaintiffs’ Motion for Summary Judgment have they argued that only title insurance
agents may own an interest in a title insurance agency or otherwise control that entity.33
Ohio law only makes it unlawful for prohibited persons to own or control a title
insurance agency.34 OAC 3901-7-04 clearly conflicts with Ohio law on this point; which
32
Defendant’s Motion for Summary Judgment at 2. (“Nothing in the Revised Code requires title insurance
agencies to be wholly owned by licensed title insurance agents. Nothing in the Revised Code prohibits title
insurance agencies from selling equity shares. Nothing in the Revised Code prohibits unlicensed equity
owners in a title insurance company from sharing in the profits and losses of the agency in proportion to
their ownership.”)
33
Defendant’s Motion for Summary Judgment at 2; see also, Plaintiffs’ Motion for Summary Judgment.
34
O.R.C. § 3901.21(E) (cannot sell stock to a third party promising to returns or profits as an inducement to
insurance); O.R.C. § 3953.21 (banks, mortgage companies, real estate firms and any subsidiaries thereof
may not act as an agent for title insurance company); O.R.C. § 3953.25 (commissions can only be shared
with licensed title insurance agents); O.R.C. § 3953.26 (prohibits the giving of any thing of value as
inducement for title insurance business); ODI Bulletin 95-3 (defines “valuable thing” to include stock
dividends and distributions of profit).
11
The ODI, by virtue of its statements in support of its Motion for Summary
Judgment, possesses an incredibly narrow view of how CBAs impact the title insurance
industry. The ODI views the capital investments of prohibited persons in title insurance
ordinary real estate transaction.35 The ODI sees no connection between the related
statutes cited by Plaintiffs because the current Superintendent, ignoring a previous and
still valid ODI Bulletin, does not believe co-ownership of a title insurance agency by a
prohibited person, who refers its title insurance business to that title insurance agency, is
owner of a title insurance agency does not refer title insurance business to the title
insurance agency, the ownership interest possessed by the unlicensed co-owner in that
agency is passive and not an inducement and is not otherwise prohibited by the
aforementioned Ohio statutes.37 After all, an “inducement” only occurs when there is
something to actively “induce.” The “inducement” depends, in part, upon the status of
the parties to the transaction and the motive for why the parties are there.38 When the
title insurance agency is co-owned by a prohibited person, the intended result or motive
35
Defendant’s Motion for Summary Judgment.
36
Defendant’s Motion for Summary Judgment at 7.
37
O.R.C. § 3953.26; see also, O.R.C. § 3953.21.
38
The term “inducement” is defined as the act of bringing about a desired result. See
http://wordnetweb.princeton.edu/perl/webwn?s=inducement (visited May 24, 2010); see also, Equitable
Life Assur. Soc. Of U.S. v. Robinson, 147 N.E.2d 648 (1957) (“Inducement” may be and often is motive for
entering into contract, and is not to be confused with consideration for contract itself).
12
of the inducement (i.e. sharing of profits derived from title insurance commissions where
the recipient of those profits is a prohibited person) is possible and illegal. The Ohio
General Assembly was clear in its distaste for prohibited person participation in the title
insurance industry by virtue of O.R.C. §§ 3953.21, 3953.25, 3953.26 and the monoline
restrictions found throughout Title 39.39 Ohio law also prohibits the provision of title
insurance commissions to those who are not licensed as title insurance agents, such as
prohibited persons.40
For an example of how these important statutes work, consider a bank that owns a
forty-nine percent (49%) interest in a title insurance agency CBA. Banks typically
requirement of their agreement to lend on a particular transaction.41 When the bank owns
a portion of the CBA that issues the required title insurance policy, the distribution of
profits from the CBA, which includes commissions generated from the sale of policies
because a thing of value is being exchanged by the CBA to the bank as an inducement for
their title insurance business. This practice is illegal. The same is true for real estate
firms, mortgage companies and their subsidiaries. The inducement or motivation for
entering into the CBA is to give a prohibited person access to stock dividends and profit
39
O.R.C. § 3953.26.
40
O.R.C. § 3953.25.
41
http://www.federalreserve.gov/pubs/settlement/default.htm (visited April 30, 2010); see also,
http://www.hud.gov/offices/hsg/ramh/res/sc2sectf.cfm (visited April 30, 2010) (“Title insurance is usually
required by the lender…”)
13
The ODI is resting the entire defense of its contradictory rule on the premise that
prohibited person co-ownership of title insurance agencies is not an inducement for title
insurance business in derogation of Ohio law.42 To say that stock dividends and
distributions of profit in a title insurance agency is not an inducement for the referral of
title insurance business is to turn the realities of the title insurance world on its head. An
Ohio title insurance agent receives or retains, as a commission, eighty percent (80%) or
as high as ninety percent (90%) of the total title insurance premiums generated from the
sale of title insurance.43 Title insurance premiums are the single largest source of
revenue for a title insurance agent or a title insurance agency in Ohio.44 The title
insurance commissions retained or paid to the title insurance agent or agency by the title
generated by title insurance agencies in Ohio.45 Given that title insurance commissions
make up most, if not all of the net profit of a title insurance agency, a division of those
3953.25. Making the ODI’s arbitrary distinction that stock dividends and profit
inducement effectively permits any person who cannot get licensed as a title insurance
agent to gain direct access to the business of title insurance by buying in. After all, a
forty-nine percent (49%) interest in a title insurance agency does not require a license or
an examination. Further, the ODI no longer collects data on CBAs to determine if a title
42
Defendant’s Motion for Summary Judgment at 7 - 12.
43
Exhibit A, attached to Plaintiffs’ Motion for Summary Judgment.
44
See Exhibit A, attached to Plaintiffs’ Motion for Summary Judgment.
45
Id.
14
insurance agency is currently operating with the involvement of a prohibited person.46
Once a rule like OAC 3901-7-04 is created, the original purpose behind the statutory
framework -- to stop prohibited person access -- is destroyed. The General Assembly did
not cede that power to the ODI. Thus, the rule must be invalidated.
The ODI would have this Court believe that stock dividends and profit
distributions generated from the revenues of title insurance agencies bear no relationship
to title insurance commissions which can only be paid to licensed title insurance agents.47
The ODI’s argument struggles with needless semantics. A prohibited person cannot be
licensed as a title insurance agent.48 Thus, it cannot enjoy title insurance commissions in
any form.49 Since 80% to 90% of a title insurance agency’s profits are derived from title
insurance commissions, any stock dividends and profit distributions are mainly
commissions in origin. To say that the stock dividend or profit distribution process of a
title insurance agency somehow launders or cleanses the taint attached to the prohibited
person’s receipt of these monies is erroneous and again, naïve. O.R.C. § 3953.25 makes
it clear that commissions are to be paid only to title insurance agents. (Emphasis added).
Prohibited persons cannot be licensed and thus cannot enjoy the fruits of a title insurance
agent’s labor. OAC 3901-7-04 clearly conflicts with the O.R.C. § 3953.25 and therefore
must be invalidated.
46
See Proposed Amended OAC 3901-7-01.
47
Defendant’s Motion for Summary Judgment at 8.
48
O.R.C. § 3953.21(B).
49
O.R.C. § 3953.25.
15
On August 1, 1995, then-ODI Director Harold T. Duryee, issued Bulletin 95-3 to
provide title agents and title insurance companies with assistance in complying with
O.R.C. § 3933.01 and § 3953.26.50 ODI Bulletin 95-3 states that stock ownership and
known as the “title insurance inducements” rule.52 The draft versions of the rule
incorporated many of the definitions found in ODI Bulletin 95-3, except that it sought to
limit the term “valuable thing” to stock dividends and distributions of partnership profits
not directly related to percentage of ownership.53 The ODI withdrew the proposed rule.
Since the current ODI Director has neither rescinded Bulleting 95-3 or
promulgated a replacement rule, the interpretations as set forth by the ODI in Bulletin 95-
CONCLUSION
For the foregoing reasons Plaintiffs are entitled to judgment as a matter of law.
Even in the light most favorable to Defendant, it is undisputed that OAC 3901-7-04
clearly conflicts with the Ohio Revised Code and only this Court can stop the ODI’s
unauthorized exercise of legislative authority. As there is clear conflict with the statute,
Judgment must be granted and Defendant’s Motion for Summary Judgment should be
denied.
50
ODI Bulletin 95-3, Exhibit D to Plaintiffs’ Motion for Summary Judgment.
51
Id.
52
See Draft Proposed Rule OAC 3901-7-06, attached to Plaintiffs’ Reply Brief in Support of their Motion
for Summary Judgment as Exhibit A.
53
See Id. at Proposed OAC 3901-7-06(7).
16
Respectfully submitted,
_______________________________
E. Bruce Hadden, Esq. (0031753)
Hadden Co., LPA
______________________________
Robert B. Holman, Esq. (0072480)
Holman, Frank & McDonald
_______________________________
Gregory W. Happ, Esq. (0008538)
Attorney at Law
17
CERTIFICATE OF SERVICE
____________________________
Robert B. Holman, Esq. (0072480)
One of the counsels for Plaintiffs
18