Jones v. Ohio National Life Insurance Company

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF OHIO

WESTERN DIVISION

RHONDA F. JONES,

Plaintiff,

Case No. 1:20-cv-654

v. JUDGE DOUGLAS R. COLE

OHIO NATIONAL LIFE

INSURANCE COMPANY, et al.,

Defendants.

OPINION & ORDER

This cause comes before the Court on Defendants Ohio National Life Insurance

Company and Ohio National Life Assurance Corporation’s (together “Ohio National”)

Motion to Dismiss (Doc. 9) Plaintiff Rhonda Jones’s Complaint (Doc. 1). For the

reasons discussed below, the Court GRANTS IN PART and DENIES IN PART

Ohio National’s Motion to Dismiss (Doc. 9).

BACKGROUND1

This Complaint stems from Plaintiff Rhonda Jones’s purchase of an insurance

policy she contends was unsuitable for her needs. At all times relevant to the

Complaint, Jones was working as a part-time bookkeeper for her husband’s small

business, making approximately $54,000 per year. (Compl., Doc. 1, #42). As part of

Jones’s investing strategy, she maintained brokerage accounts with financial advisor

1 For purposes of a motion to dismiss, the Court accepts as true the factual allegations in the

Complaint. Thus, the Court reports those allegations here, but with the disclaimer that these

facts are not yet established and may never be.

2 Refers to PAGEID #.

James Flynn, who was at that time associated with broker-dealer Voya Financial

Advisors located in Greenville, South Carolina. (Id.). Jones alleges that in 2016 she

approached Flynn with an interest in long-term investments, including variable life

insurance policies. (Id.). Relying on Flynn’s advice, Jones applied for what she

believed was a “standard” variable life insurance policy issued by the Defendant, Ohio

National Life Insurance Company. (Id. at #6). In recommending the policy to Jones,

Flynn told her that it was a “solid investment” and that the premiums on the policy

were tax deductible. (Id.).

According to Jones, however, the policy was not “standard.” It was in fact a

“key man” policy, a type of insurance typically “purchased by companies to insure the

lives of key executives and ensure business continuity in case of their death.” (Id.).

On this type of policy, Jones says, the company for which the executive works

generally pays the premiums and stands to benefit if the insured executive dies. (Id.

at #6–7). Ohio National originally issued the policy to Jones in the amount of

approximately $5,000,000, which was increased, on Flynn’s advice, to $6,000,000 a

few months later. (Id. at #6).

Jones alleges that this policy “was entirely unsuited” to her needs as a “middle-

aged bookkeeper with a relatively modest income.” (Id. at #7). Moreover, she alleges

that Ohio National should have known its unsuitability because the premiums—

approximately $200,000 per year—were paid directly by Jones, but the policy was for

the benefit of her husband’s company. (Id.). Although she asserts that Flynn “falsely

inflated [her] income and assets on the application,” she says that Ohio National

nonetheless acted unreasonably in failing to investigate the “red flags” in her

application. (Id.). And Ohio National was not merely ignorant, Jones contends,

because Flynn told her he had “spoken to several representatives at Ohio National,

and everyone, including the president of the company, [had] made [issuing the policy]

a top priority.” (Id. at #6).

Jones also addresses the alleged relationship between Ohio National and

Flynn. Specifically, she alleges Ohio National maintains “Just In Time”

appointments, by which independent brokers-dealers may be appointed authorized

agents of Ohio National. (Id. at #4). On Jones’s information and belief, Flynn was

acting as an authorized agent of Ohio National when he recommended the insurance

product at issue in this suit. (Id.).

According to Jones, financial pressure incentivized Flynn to suggest this

unsuitable product. Selling Jones this particular policy would have benefited Flynn

because “key man” policies are “extremely profitable,” generating “substantial

premiums” for the issuer and “high commissions” for the selling agent. (Id. at #9).

And Jones alleges that Flynn was in financial straits when he recommended the key

man policy, having filed for bankruptcy in 2013 claiming debts of over $3.5 million.

(Id. at #5). Before he recommended this policy to Jones in 2016, at least one customer

had filed a dispute against Flynn, claiming more than $120,000 in damages for

“unauthorized, unsuitable trades” on the customer’s account. (Id.).

Jones filed her Complaint in the Northern District of Ohio on February 18,

2020, asserting claims of securities fraud, violation of Ohio consumer protection law,

common law negligence, and unjust enrichment. (Id. at #9–15). Ohio National filed a

motion to dismiss or, in the alternative, to transfer venue to the Southern District of

Ohio, on April 2, 2020. (Doc. 9). Jones timely responded in opposition (“Opp’n,” Doc.

10) on April 22, 2020, and Ohio National replied in support of its Motion (Doc. 11) on

May 5, 2020. Without addressing the merits of the Motion to Dismiss, the then-

assigned Judge granted the alternative Motion to Transfer venue on August 19, 2020,

thereby transferring the case to this Court. The matter is now before the Court on

the Motion to Dismiss (Doc. 9).

LEGAL STANDARD

At the motion to dismiss stage, a complaint must “state[] a claim for relief that

is plausible, when measured against the elements” of a claim. Darby v. Childvine,

Inc., 964 F.3d 440, 444 (6th Cir. 2020) (citing Binno v. Am. Bar Ass’n, 826 F.3d 338,

345–46 (6th Cir. 2016)). “To survive a motion to dismiss, in other words, [Jones] must

make sufficient factual allegations that, taken as true, raise the likelihood of a legal

claim that is more than possible, but indeed plausible.” Id. (citations omitted).

In making that determination, the Court must “construe the complaint in the

light most favorable to the plaintiff, accept its allegations as true, and draw all

reasonable inferences in favor of the plaintiff.” Bassett v. Nat’l Collegiate Athletic

Ass’n, 528 F.3d 426, 430 (6th Cir. 2008) (internal quotation omitted). That is so,

however, only as to factual allegations. The Court need not accept “‘naked assertions’

devoid of ‘further factual enhancement.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(brackets omitted) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 557 (2007)).

Likewise, the Court need not accept as true any legal conclusions alleged in a

complaint; “labels and conclusions” or a “formulaic recitation of the elements of a

cause of action” will not suffice. Id.

With that in mind, the well-pled facts must be sufficient to “raise a right to

relief above the speculative level,” Twombly, 550 U.S. at 555, such that the asserted

claim is “plausible on its face.” Iqbal, 556 U.S. at 678. Under the Iqbal/Twombly

plausibility standard, courts play an important gatekeeper role, ensuring that claims

meet a threshold level of factual plausibility before defendants are subjected to the

potential rigors (and costs) of the discovery process. Discovery, after all, is not meant

to allow parties to discover whether a claim in fact exists, but rather to provide a

process for gathering evidence to substantiate an already plausibly-stated claim.

Green v. Mason, 504 F. Supp. 3d 813, 827 (S.D. Ohio 2020).

LAW AND ANALYIS

A. Jones Adequately Alleges That Flynn’s Alleged Violation Of Rule 10b-

5 May Be Imputed To Ohio National.

Jones’s first cause of action asserts Ohio National violated § 10(b) of the

Securities and Exchange Act of 1934, and its implementing regulation, Securities and

Exchange Commission (“SEC”) Rule 10b-5. More specifically, Jones alleges Ohio

National violated Rule 10b-5 by failing to undertake a “suitability determination”

with respect to her purchase of the “key man” insurance policy. (Compl., Doc. 1, #10).

The Sixth Circuit has recognized (though only infrequently) a securities

“suitability” claim as “essentially [a] fraud claim[].”Craighead v. E.F. Hutton & Co.,

899 F.2d 485, 493 (6th Cir. 1990); see also Robert N. Clemens Tr. v. Morgan Stanley

DW, Inc., 485 F.3d 840, 848 (6th Cir. 2007) (“A suitability claim is a type of section

10(b) fraud claim.” (citing Banca Cremi, S.A. v. Alex. Brown & Sons, Inc., 132 F.3d

1017, 1032 (4th Cir. 1997))). Other circuits have likewise recognized such claims. See

Banca Cremi, 132 F.3d at 1032 (citing “unsuitability” cases in the Tenth, Sixth, First,

and Second Circuits).

Rule 10b-5, which implements § 10(b) of the Securities and Exchange Act of

1934, prohibits three categories of conduct. The rule makes it unlawful for any person:

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state

a material fact necessary in order to make the statements made, in the

light of the circumstances under which they were made, not misleading,

or

(c) To engage in any act, practice, or course of business which operates

or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5. Jones does not make clear in her Complaint exactly which of

these three categories she claims Ohio National violated. That may matter, as the

category potentially impacts the relevant analytical framework. For example, the

Tenth Circuit has differentiated between “suitability” claims based on

misrepresentation or omission (i.e., 10b-5(b)) and those based on other fraudulent

conduct (i.e., 10b-5(a) and (c)), the latter of which it treats as analogous to “churning”

claims. O’Connor v. R.F. Lafferty & Co., 965 F.2d 893, 897–98 (10th Cir. 1992)

(observing that “[s]ome courts … have analyzed [unsuitability] simply as a

misrepresentation or failure to disclose,” and contrasting an unsuitability claim

based on fraud by conduct, which is “a violation of Rule 10b–5(a) and (c) and is

analogous to a churning claim”).

The Court concludes that 10b-5(b) is the most appropriate vehicle to analyze

Jones’s claim. Cf. O’Connor, 965 F.2d at 897 (“In [a suitability] case, the broker has

omitted telling the investor the recommendation is unsuitable for the investor’s

interests. The court may then use traditional laws concerning omission to examine

the claim.”). The case at bar presents no similarities to a classic “churning” case,

wherein “the broker ‘overtrades’ a relying customer’s account to generate inflated

sales commissions.” Craighead, 899 F.2d at 489 (citing Armstrong v. McAlpin, 699

F.2d 79, 90 (2d Cir. 1983)). Moreover, although Jones does not explicitly identify a

particular subsection of Rule 10b-5, both parties appear to treat her claim as arising

under subsection (b), that is, as a “misrepresentation or omission” claim. (See Br. in

Supp., Doc. 9-1, #50 (“To state a valid claim under SEC Rule 10b-5, a plaintiff ‘must

allege, in connection with the purchase or sale of securities, the misstatement or

omission of a material fact ….’”); Opp’n, Doc. 10, #71 (“Ohio National is liable for

Flynn’s fraudulent misrepresentations and omissions in relation to issuing Mrs.

Jones this wholly unsuitable key man policy.”)). Thus, in analyzing the plausibility of

Jones’s claim, the Court will refer to traditional 10(b) misrepresentation and omission

cases.

To prevail on a Section 10(b) “suitability” claim predicated on

misrepresentation or omission, a plaintiff must establish five elements: “(1) that the

securities purchased were unsuited to the buyer’s needs; (2) that the defendant knew

or reasonably believed the securities were unsuited to the buyer’s needs; (3) that the

defendant recommended or purchased the unsuitable securities for the buyer

anyway; (4) that, with scienter, the defendant made material misrepresentations (or,

owing a duty to the buyer, failed to disclose material information) relating to the

suitability of the securities; and (5) that the buyer justifiably relied to his detriment

on the defendant’s fraudulent conduct.” Rhinehimer v. U.S. Bancorp Invs., Inc., No.

CV2011136WOBREW, 2013 WL 11303921, at *1 (E.D. Ky. May 8, 2013) (quoting

Banca Cremi, 132 F.3d at 1032); see also Brown v. E.F. Hutton Group, Inc., 991 F.2d

1020, 1031 (2d Cir. 1993); Bourbonnais v. Tesch, No. 14-C-966, 2015 WL 778627, at

*3–4 (E.D. Wis. Feb. 24, 2015).

Thus, an unsuitability claim strongly resembles a typical 10(b) fraud claim,

but additionally requires “(a) proof of the knowing purchase or recommendation of

unsuitable securities, and (b) that the misrepresentations and omissions in question

relate to the suitability of the securities.” See Robert N. Clemens Tr., 485 F.3d at 850

(emphasis added) (quoting Louros v. Kreicas, 367 F.Supp.2d 572, 587 (S.D.N.Y.

2005)). Ultimately, “an investment is unsuitable for an investor if what the broker

recommends contradicts the investment goals communicated to the broker by the

investor.” Id. at 849 (citing Brown, 991 F.2d at 1031).

In addition to pleading the necessary substantive elements, a plaintiff must

meet the heightened pleading standards of Fed. R. Civ. P. 9(b) and the Private

Securities Litigation Reform Act (“PSLRA”) of 1995 to survive a motion to dismiss a

securities fraud claim. Rule 9(b) requires that a plaintiff “state with particularity the

circumstances constituting fraud or mistake.” See also Craighead, 899 F.2d at 493.

And the PSLRA states that, for any materially false statement or omission alleged,

“the complaint shall specify each statement alleged to have been misleading, the

reason or reasons why the statement is misleading, and, if an allegation regarding

the statement or omission is made on information and belief, the complaint shall state

with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1).

The PSLRA also requires the complaint “state with particularity facts giving rise to

a strong inference that the defendant acted with the required state of mind.” Id.

§ 78u-4(b)(2)(A).

In seeking dismissal, Ohio National argues Jones has failed to make out a

securities fraud claim against the company because liability under Section 10(b)

requires a misrepresentation or omission. Jones has failed to allege such a

misrepresentation or omission, Ohio National contends, for the simple reason that

Jones has failed to allege that Ohio National itself made any representations or

omissions to Jones at all. (Br. in Supp., Doc. 9-1, #50). Rather, according to Ohio

National, the Complaint alleges that it was Flynn who recommended and made

representations about the Policy. (Id.). Nor can Ohio National be directly liable for its

own alleged failure to undertake a suitability analysis, it says, as the law places

responsibility for any suitability review solely on Flynn and Voya, the third-party

broker-dealer that sells the security, not the issuer itself.

Jones offers three responses. First, she argues that Flynn was an “authorized

agent” of Ohio National, and therefore that his misdeeds may be attributed to Ohio

National as the principal. (Opp’n, Doc. 10, #71). Second, Jones claims that federal

securities laws require Ohio National itself to engage in a suitability determination,

even if Flynn was not its agent. Jones cites Cooper v. Pacific Life Insurance Co., 229

F.R.D. 245 (S.D. Ga. 2005), for the proposition that an insurer’s “failure to undertake

suitability reviews, or [to] engage in suitability oversight” can constitute a violation

of Rule 10b-5. (Compl., Doc. 1, #10). Third, Jones says that an insurer’s duty to

investigate the suitability of an annuity is embodied in the Ohio Administrative Code.

(Opp’n, Doc 10, #76 (citing Ohio Admin. Code § 3901-6-13(F)(3))).

Of those three arguments, the Court starts (and ends) with the agency issue.

On that front, Jones’s Complaint alleges that Ohio National “maintain[s] a ‘Just In

Time’ appointments procedure that permits independent brokers-dealers to be

appointed [Ohio National’s] authorized agents,” and that “[o]n information and belief,

Flynn was … an authorized agent of Defendants, selling their products.” (Compl.,

Doc. 1, #4). For its part, Ohio National seems to concede that it had some kind of

agency relationship with Flynn. However, it argues that Flynn was authorized to act

only in a “limited role”—as an insurance agent who “cannot by law sell a security.”

(Reply, Doc. 11, #87–88; id. at #90 (“That Flynn also happened to be authorized to act

as a limited agent of Ohio National for purposes of selling insurance policies has no

bearing on his alleged recommendation of an unsuitable security ….”)). It says Jones’s

claims arise “entirely and exclusively out of Flynn’s status as a registered

representative associated with the securities broker-dealer Voya Financial,” rather

than out of any relationship between Flynn and Ohio National. (Id. at #88). In other

words, Flynn may have been an agent, Ohio National says, but not for the purposes

of the misrepresentations or omissions at issue here.

The Court is disinclined to rely on Ohio National’s proposed distinction, at least

at the motion to dismiss stage. For one thing, a variable life insurance policy is

generally recognized as a “hybrid” product—part insurance, part security. Lander v.

Hartford Life & Annuity Ins. Co., 251 F.3d 101, 105 (2d Cir. 2001) (“Variable

annuities are typically characterized as ‘hybrid products,’ possessing characteristics

of both insurance products and investment securities.”). Thus, Ohio National’s claim

that Flynn is an agent only for insurance purposes may not be the cure-all that Ohio

National claims. For example, in Nelson v. Pacific Life Insurance Co., a factually

similar case involving the sale of variable annuities, the Southern District of Georgia

denied an insurer’s motion to dismiss, in part because the plaintiff alleged that the

insurer-defendant had “a principal-agent relationship with the individual NASD

registered representatives that [sold] the company’s variable annuities, making [the

insurer] primarily liable for the alleged omission of a material fact.” CIV.A. CV203-

131, 2004 WL 1592617, at *3 (S.D. Ga. July 12, 2004). The court denied the motion

to dismiss despite the facts—similar to the facts Ohio National relies on here—that:

(1) the defendant was an insurance company; (2) the point-of-sale representatives

were associated with independent broker-dealers, see id. (alleged agents were

“individual NASD registered representatives that sell the company’s variable

annuities”); and (3) the allegedly unsuitable products were “hybrid,” see id. at *1 (“A

variable annuity is an insurance contract that is subject to regulation under state

insurance and [federal] securities laws.” (Citation omitted)). In short, whether Flynn

was merely selling an “insurance policy” or an “unsuitable security” is not so simple

an inquiry as Ohio National suggests, meaning that whether his conduct was outside

the scope of agency, even on Ohio National’s account of events, may require further

factual investigation.

But even more fundamentally, as the discussion in Nelson also aptly

illustrates, the existence and scope of an agency relationship is generally a question

of fact, rather than law, a point equally applicable under whichever State’s law (Ohio

or South Carolina) applies here.3 Fuller v. Anchor Pointe Marina, 100 N.E.3d 1281,

1287 (Ohio Ct. App. 2017) (“The existence of an agency relationship is a question of

fact.” (quoting Dickinson v. Charter Oaks Tree & Landscaping Co., No. 02AP-981,

2003 WL 1924638, at *4 (Ohio Ct. App. Apr. 24, 2003))); Whitt v. Serv. Mut. Ins. Assn.,

No. 1264, 1981 WL 10261, at *3 (Ohio Ct. App. Feb. 26, 1981) (“The scope of Kennedy’s

agency, as most questions of scope of agency, is a question of fact.”); Holmes v. McKay,

513 S.E.2d 851, 854 (S.C. Ct. App. 1999) (“Usually, whether an agency relationship

exists and the scope of the alleged agent’s authority are questions of fact for the jury.”

(citing Am. Fed. Bank v. Number One Main Joint Venture, 467 S.E.2d 439, 442 (S.C.

1996))).

Here, Jones has alleged that Flynn was an appointed agent of Ohio National,

and Ohio National has conceded that he was, at least for purposes of selling

3 Jones asserts that “South Carolina law … governs the agency issue because Flynn was a

broker in that state.” (Opp’n, Doc. 10, #72). Ohio National does not address the choice-of-law

question. The Court need not decide precisely which State’s law controls at this stage,

however, because the result appears the same under either.

insurance. Although agency for the purpose of selling insurance does not

automatically establish agency for the purpose of giving investment advice, Brainard

v. Am. Skandia Life Assurance Corp., 432 F.3d 655, 662 (6th Cir. 2005), the only

question at this stage is whether Jones has stated a plausible claim. The Court

concludes that she has. Her allegation that Flynn was Ohio National’s “agent” for

purposes of the advice he gave her suffices, if barely, to set forth a plausible claim. Of

course, if it ultimately turns out of as a matter of undisputed fact that Flynn’s agency

relationship with Ohio National did not extend to the representations at issue here,

the Court will certainly revisit the scope issue on summary judgment. But that is a

question for another day.

Because the Court determines that Jones’s claim survives based on her agency

allegation, it does not reach her alternative theories of liability—that (1) federal

securities laws require Ohio National itself to engage in a suitability determination,

and (2) the Ohio Administrative Code creates a duty for an insurer to investigate the

suitability of an annuity. That is because “the number of legal theories for holding a

defendant liable for securities fraud does not multiply the number of the plaintiff’s

claims. Therefore, what matters for present purposes is that [Jones] [has] stated

claims against [Ohio National] under principles of agency law.” Bourbonnais v.

Ameriprise Fin. Servs. Inc., No. 14-C-966, 2015 WL 12991000, at *6 (E.D. Wis. Aug.

20, 2015) (internal citation omitted).

Nevertheless, while not strictly necessary, the Court offers a word on whether

Ohio National itself is primarily liable for its failure to undertake a suitability review.

The only case Jones cites on that issue is Cooper, 229 F.R.D. 245. While that court

found that “a variable annuity issuer’s failure to undertake suitability reviews, or

engage in suitability oversight, could constitute securities fraud,” it simultaneously

recognized that “the responsibility for determining suitability at the point of sale is

typically the domain of the broker-dealer.” Id. at 255–56 (emphasis added).4

Cooper’s rationale for extending the suitability duty beyond its “typical

domain” included that the insurance company was “in a better position to determine

suitability” when placing tax-deferred annuities within qualified (tax-deferred)

retirement plans, and that plaintiffs had “presented some evidence that [the

insurance company] actually increased the difficulty of the suitability determination

4 Other courts have expressed a similar understanding: that the broker primarily shoulders

responsibility for determining an investment’s suitability. See, e.g., O’Connor, 965 F.2d at

897 (“In such a case, the broker has omitted telling the investor the recommendation is

unsuitable for the investor’s interests.”) (emphasis added). This includes the Sixth Circuit,

which has more than once couched the “suitability” analysis in terms of the “broker.” See

Rhinehimer, 787 F.3d at 806 n.3 (“In essence, unsuitability fraud occurs where a broker

knows or reasonably believes certain securities to be unsuitable to a client’s needs, but

recommends them anyway.”) (emphasis added); Robert N. Clemens Tr., 485 F.3d at 849–50

(noting that a plaintiff would normally plead an unsuitability claim “by alleging facts

regarding his or her investment objectives at the time of investment, that those objectives

were communicated to the broker, and that the broker nonetheless recommended securities

that did not further those investment goals”) (emphasis added).

Imposing such a duty on the broker seems particularly reasonable given the essence of an

unsuitability claim: that the recommended security is inconsistent with the plaintiff’s

investment objectives. In a typical stock-based security transaction, the security’s issuer has

no reason to know of the plaintiff’s investment goals, and therefore placing a suitability duty

on the issuer in that case would make little sense. Admittedly, such a consideration might

apply with less force to a situation where, as here, the issuer of an insurance policy ultimately

must approve the purchaser’s application. Jones certainly proceeds under this theory,

alleging that the information on her application should have put Ohio National on notice of

an unsuitable investment choice. Again, however, the Court need not, and does not, decide

whether such an allegation succeeds in stating a claim for securities fraud.

by issuing a misleading prospectus.” Id. at 256. The court concluded by emphasizing

the narrowness of its holding, confining it “to the unique facts presented.” Id.

Moreover, that decision came in the context of a motion for class certification,

and after significant discovery had already occurred. Here, on the basis of the

Complaint—which fails to allege the sort of unique circumstances in Cooper—and

limited briefing, the Court is unable to determine the propriety of extending the

rationale of Cooper to this case, and therefore declines to decide that question.

In sum, the Court DENIES Ohio National’s Motion to Dismiss (Doc. 9) with

respect to Jones’s Section 10(b) securities claim.

B. Jones Fails To State A Claim Against Ohio National Under Ohio’s

Consumer Sales Practices Act.

Jones’s second cause of action alleges that Ohio National violated Ohio’s

Consumer Sales Practices Act (“CSPA”). The Ohio CSPA prohibits suppliers from

engaging in unfair or deceptive acts or practices “in connection with a consumer

transaction.” Ohio Rev. Code § 1345.02(A). The definition of “consumer transaction,”

however, excludes “transactions between persons, defined in sections 4905.03 and

5725.01 of the Revised Code, and their customers.” Id. § 1345.01(A). And “persons” in

§ 5725.01 includes an “[i]nsurance company,” which is in turn defined to include

“every corporation, association, and society engaged in the business of insurance of

any character, or engaged in the business of entering into contracts substantially

amounting to insurance of any character.” Id. § 5725.01(C). Ohio National argues

that Jones’s second cause of action fails as a matter of law because the transaction at

issue amounts to a transaction between an insurance company and its customer, thus

exempting it from the CSPA. (Br. in Supp., Doc. 9-1, #53 (citing Dillon v. Farmers

Ins. of Columbus, Inc., 47 N.E.3d 794, 794 (Ohio 2006)).

Jones responds that Ohio National misreads the Ohio Supreme Court’s

statement in Dillon v. Farmers Insurance of Columbus, Inc., that the CSPA “exempts

transactions between insurers and their customers from its definition of consumer

transaction.” Dillon, 47 N.E.3d at 798. According to Jones, that case “applies

narrowly to instances where an insurer fails to notify its insured that it has repaired

an automobile using non-OEM compliant parts.” (Opp’n, Doc. 10, #77–78). Jones is

correct that the court in Dillon was focused on the obligations imposed on “insurers

who provide their customers with automobile-repair estimates.” See Dillon, 47 N.E.3d

at 798 (citing Ohio Rev. Code § 1345.81). But Ohio National need place no reliance in

that case—the plain language of §§ 1345.01(A) and 5725.01 of the Ohio Revised Code

forecloses Jones’s claim in this respect. And, in any case, Ohio National cited the case

only for the Ohio Supreme Court’s explanation of the insurance exemption. See

Dillon, 47 N.E.3d at 798 (citing Ohio Rev. Code § 1345.01(A)).

In light of the statute’s plain language, the Court concludes that it is Jones

who overreads Dillon. Jones emphasizes that, according to Dillon, a “consumer may

… seek a declaratory judgment, an injunction, or other appropriate relief against an

act or practice that violates [Chapter 1345 of the Ohio Revised Code].” (See Opp’n,

Doc. 10, #78) (quotation marks omitted). Based on that, she argues that she should

be allowed to re-plead her CSPA claim to seek these other forms of remedy. (Id.). To

be sure, § 1345.09 provides for declaratory, injunctive, or other appropriate relief

“against an act or practice that violates” Chapter 1345. But the Ohio Supreme Court

made that statement specifically in the context of Revised Code § 1345.81, which

“imposes obligations on insurers who provide their customers with automobile-repair

estimates that are based on the use of non-OEM parts.” Dillon, 47 N.E.3d at 798. In

that statement, the court was merely explaining that an insurer may violate

1345.81(B)(1) by failing to notify a customer that their automobile has been repaired

using non-manufacturer parts. But such a violation does not constitute an “unfair

and deceptive act or practice” (and therefore does not qualify under the remedial

provision § 1345.81(E)). None of this discussion provides any help to Jones, however,

because she has not pointed to any way in which Ohio National allegedly violated

Chapter 1345. The only provisions Jones cites are §§ 1345.02 and 1345.03, but Ohio

National cannot run afoul of those because, as detailed above, it was acting purely as

an insurer, and therefore its acts were not “in connection with a consumer

transaction.”

Alternatively, Jones says Ohio National violated the OCSPA because it

violated Ohio Administrative Code § 3901-6-13(4)(b).5 (Compl., Doc. 1, #12 (citing

Frey v. Vin Devers, Inc., 608 N.E.2d 796, 799–800 (Ohio Ct. App. 1992)). This

argument fails for two reasons. First, as above, the sale of an insurance policy is not

a “consumer transaction.” Second, there is an important difference between the Ohio

Administrative Code section at issue in Frey—the case on which Jones relies—and

5 The Court notes that the specific Ohio Administrative Code section cited in the Complaint

(§ 3901-6-13(4)(b)) does not appear to exist; however, the Court’s conclusion applies

regardless of which section of Rule 3901-6-13 Jones relies on.

the OAC provision here. In particular, the Attorney General promulgated the OAC

provision in Frey specifically to further “define … any act or practice that violates

R.C. 1345.02(A).” 608 N.E.2d at 799. Here, by contrast, the OAC section Jones cites

resides in a separate Chapter, one that vests enforcement authority “exclusively in

the superintendent of insurance.” Ohio Admin. Code § 3901-6-13(H)(3). That

precludes Jones from seeking to rely on this OAC provision as support for her CSPA

claim. The Court thus DISMISSES that claim WITH PREJUDICE.

C. Jones Fails To State A Claim For Negligence Against Ohio National

Under Ohio Law.

Jones’s third cause of action alleges Ohio National’s negligence under Ohio

common law. (Compl., Doc. 1, #13–15). In order to recover on a negligence claim, a

plaintiff must prove “(1) the existence of a legal duty, (2) the defendant’s breach of

that duty, and (3) injury that is the proximate cause of the defendant’s breach.”

Beckemeyer v. Gelco Corp., 828 F. App’x 251, 253 (6th Cir. 2020) (quoting Wallace v.

Ohio Dep’t of Com., 773 N.E.2d 1018, 1025–26 (Ohio 2002)). In negligence, the concept

of “duty,” though sometimes “elusive,” “refers to the relationship between the plaintiff

and the defendant from which arises an obligation on the part of the defendant to

exercise due care toward the plaintiff.” Wallace, 773 N.E.2d at 1026. The existence of

a duty generally depends upon the foreseeability of harm: “if a reasonably prudent

person would have anticipated that an injury was likely to result from a particular

act, the court could find that the duty element of negligence is satisfied.” Id. (citing,

e.g., Texler v. D.O. Summers Cleaners & Shirt Laundry Co. 693 N.E.2d 271 (Ohio

1998)).

Ohio National argues Jones’s negligence claim must be dismissed because she

has failed to allege any duty Ohio National owed to her and because her damages are

purely economic and therefore barred by Ohio’s economic loss rule. (Br. in Supp., Doc.

9-1, #55–56). These contentions are interrelated, in that they both relate to the source

of Ohio National’s alleged duty.

Start with the economic loss rule. Ohio National quotes the Ohio Supreme

Court: “[T]he well-established general rule is that a plaintiff who has suffered only

economic loss due to another’s negligence has not been injured in a manner which is

legally cognizable or compensable.” (Id. at #55 (quoting Corporex Dev. & Constr. Mgt.,

Inc. v. Shook, Inc., 835 N.E.2d 701, 704 (Ohio 2005))). Absent a contractual

relationship, then, there is generally “no … duty to exercise reasonable care to avoid

intangible economic … losses to others.” Floor Craft Floor Covering, Inc. v. Parma

Cmty. Gen. Hosp. Ass’n, 560 N.E.2d 206, 208 (Ohio 1990). “The primary purpose of

the economic-loss doctrine,” though, “is to ‘maintain the line of demarcation between

tort law and contract law’ in situations in which both tort and contract theories could

apply.” Motorists Mut. Ins. Co. v. Ironics, Inc., __ N.E.3d __, 2022 WL 852346, *7

(Ohio Mar. 23, 2022) (quoting Lesiak v. Cent. Valley Ag Coop., Inc., 808 N.W.2d 67,

82 (Neb. 2012)). “The economic-loss doctrine therefore prevents the tortification of

contract law.” Id. (quotation omitted).

Consistent with that latter understanding, “where a plaintiff has suffered only

economic harm as a result of a defendant’s breach of duty, the economic-loss rule will

bar the tort claim if the duty arose only by contract.” Mulch Mfg., Inc. v. Advanced

Polymer Sols., LLC, 947 F.Supp.2d 841, 856 (S.D. Ohio 2013) (emphasis added)

(quoting Campbell v. Krupp, 961 N.E.2d 205, 211 (Ohio Ct. App. 2011)). But a

corollary must also then be true: the rule is inapplicable, and a plaintiff suffering only

economic damages may proceed in tort, if the defendant breached a duty that does

not arise solely from a contract. Id.; see also Corporex, 835 N.E.2d at 705; accord

Campbell, 961 N.E.2d at 205 (in determining whether the economic-loss rule applies

to tort claims, courts must examine whether the defendant owes any duties to the

plaintiff “that [are] imposed by law instead of by contract”). In other words, “where a

tort claim alleges a duty was breached independent of the contract, the economic loss

rule does not apply.” Navistar, Inc. v. Dutchmaid Logistics, Inc., 171 N.E.3d 851, 861

(Ohio Ct. App. 2021) (emphasis added); see also Windsor Med. Ctr., Inc. v. Time

Warner Cable, Inc., 167 N.E.3d 23, 29 (Ohio Ct. App. 2021) (same).

A duty is independent of a contract if the defendant would owe that duty “even

if no contract existed.” 425 Beecher, LLC v. Unizan Bank, Nat’l Ass’n, 927 N.E.2d 46,

59 (Ohio Ct. App. 2010) (quoting Textron Fin. Corp. v. Nationwide Mut. Ins. Co., 684

N.E.2d 1261, 1270 (Ohio Ct. App. 1996)). One such “preexisting” tort duty that may

support recovery of purely economic damages, for example, is the “duty not to

negligently supply false information to those relying upon it”—that is, the duty

underlying the tort of negligent misrepresentation. Sona Techs., LLC v. Barber, No.

2:08-CV-468, 2010 WL 11537997, at *5 (S.D. Ohio Mar. 12, 2010) (citing 425 Beecher,

927 N.E.2d at 58–60); see also Corporex, 835 N.E.2d at 705 (“Liability in Haddon View

was based exclusively upon this discrete, preexisting duty in tort and not upon any

terms of a contract or rights accompanying privity. … DSI fails to identify any duty

in tort analogous to the duty identified in Haddon View.”)).

At bottom, for Jones to proceed with her negligence claim, she must point to

“some positive legal duty imposed by law because of the relationship of the parties,”

duties that have nothing to do with the insurance policy. Solid Gold Jewelers v. ADT

Sec. Sys., Inc., 600 F.Supp.2d 956, 960 (N.D. Ohio 2007). She says she can. (Opp’n,

Doc. 10, #81 (quoting Campbell, 961 N.E.2d at 211)). Specifically, Jones points to two

potential candidates. First, Jones argues that OAC § 3901-6-13(F)(1) requires Flynn

to recommend only suitable insurance products, and that his breach of that duty is

imputed to Ohio National as Flynn’s principal. (Id. at #79). Second, Jones says Ohio

National, as the insurer, directly owed her a duty under another provision of the same

section, § 3901-6-13(F)(3), which, according to Jones, requires that “an insurer shall

not issue an annuity recommended to a consumer unless there is a reasonable basis

to believe the annuity is suitable based on the consumer’s suitability information.”

(Id.). The Court takes them in that order.

There is an insurmountable problem with Jones’s reliance on the first of those

two provisions. Another section of the same rule, § 3901-6-13(C)(2), unequivocally

states that:

Nothing herein shall be construed to create or imply a private cause of

action for a violation of this rule or to subject an insurance agent to civil

liability under the best interest standard of care outlined in this rule or

under standards governing the conduct of a fiduciary or a fiduciary

relationship.

§ 3901-6-13(C)(2) (emphasis added). That forbidden maneuver (i.e., subjecting an

insurance agent to civil liability) is precisely what Jones seeks to do here—she seeks

to subject Ohio National to civil liability (on an agency theory) for Flynn’s breach of

the duty the rule imposes. As Section (C)(2) precludes direct liability for Flynn,

though, Ohio National cannot be subject to derivative liability under that theory.

As for the second, Jones’s attempt to attack Ohio National itself under § 3901-

6-13(F)(3) fares little better. Consistent with the Chapter’s specific disclaimer of any

private right of action, Section 3901-6-13(H) expressly provides that, “[i]f a violation

[of the rule] occurs, … the superintendent may order” certain remedies, including

“[a]ppropriate penalties and sanctions.” (Emphasis added). And it further declares

that “authority to enforce compliance with this rule is vested exclusively in the

superintendent of insurance.” (Emphasis added).

As the court in Strack v. Westfield Companies, 515 N.E.2d 1005 (Ohio Ct. App.

1986), observed, inferring a private cause of action from a provision of the Ohio

Administrative Code that is silent on the matter “would be inconsistent with the

existing administrative enforcement scheme” and would “not necessarily further the

policy behind” the code. Id. at 1008; see also Ohio Admin. Code § 3901-6-13(C)(2)

(“Nothing herein shall be construed to create or imply a private cause of action … or

to subject an insurance agent to civil liability ….”). But the same inconsistency that

the Oho court disclaimed in Strack would arise if a plaintiff could accomplish an

identical end through the mere artifice of (1) citing the Administrative Code provision

to create a duty, and then (2) using a negligence theory to sue on that duty. In short,

Jones cannot rely on those two code provisions as the basis for a negligence claim,

and she has failed to articulate or cite authority for any other common law duty.

Alternatively, Jones argues that, even if the Administrative Code does not

supply the necessary tort duty with respect to the policy’s suitability, the Court

should permit her to re-plead her Complaint because “the facts … would support a

claim for negligent hiring and supervision of Flynn by the principal, Ohio National.”

(Opp’n, Doc. 10, #80). As the Sixth Circuit has observed, though, “[a] request for leave

to amend[, presented] almost as an aside, to the district court in a memorandum in

opposition to the defendant’s motion to dismiss is … not a motion to amend.” La. Sch.

Emps. Ret. Sys. V. Ernst & Young, LLP, 622 F.3d 471, 486 (6th Cir. 2010) (internal

quotation marks omitted). Jones is not “entitled to an advisory opinion from the Court

informing [her] of the deficiencies of the claim and then an opportunity to cure those

deficiencies.” Id. (quoting Begala v. PNC Bank, Ohio, N.A., 214 F.3d 776, 784 (6th

Cir. 2010)) (emphasis omitted).

If Jones believes that she can set forth a claim for negligent supervision, she

should seek leave to do so. The Court notes, however, that, as one element of any such

claim, “a plaintiff must demonstrate that the employer knew or should have known

of the employee’s … tortious propensities.” Collins v. Flowers, No. 04CA008594, 2005

WL 1763615, at *6 (Ohio Ct. App. July 27, 2005) (citation omitted). The employer’s

ability to foresee the employee’s allegedly tortious conduct is determined by

considering the totality of the circumstances, and “it is only when the totality of the

circumstances are ‘somewhat overwhelming’ that the [employer] will be held liable.”

Staten v. Ohio Exterminating Co., Inc., 704 N.E.2d 621, 624 (Ohio Ct. App. 1997)

(citing Evans v. Ohio State Univ., 680 N.E.2d 161, 173 (Ohio Ct. App. 1996)). That is

a demanding standard.

In sum, Jones has failed to identify an appropriate legal duty on which to base

her negligence claim. Given Jones’s invocation of a potential negligent supervision

theory, though, the Court DISMISSES her negligence claim as pled, but WITHOUT

PREJUDICE.

D. Jones Plausibly Alleges A Claim For Unjust Enrichment Against Ohio

National.

Jones’s fourth and final cause of action alleges unjust enrichment under Ohio

common law. (Compl., Doc. 1, #15). To state a claim for unjust enrichment in Ohio,

Jones must plausibly allege that (1) she conferred a benefit on Ohio National; (2) Ohio

National had knowledge of the benefit; and (3) the Ohio National retained the benefit

under circumstances where it would be unjust to do so without payment. Hambleton

v. R.G. Barry Corp., 465 N.E.2d 1298, 1302 (Ohio 1984). Recovery under unjust

enrichment is designed to compensate the plaintiff for the benefit he or she has

conferred upon another, not to compensate the plaintiff for a loss suffered. Hughes v.

Oberholtzer, 123 N.E.2d 393, 397 (Ohio 1954).

The Court understands Jones to allege that her payment of premiums under

the key man policy constitutes a “benefit” conferred by her on Ohio National. And one

may assume that Ohio National “had knowledge” that it was receiving those

premiums. The trouble with that theory, though, is that a contract indisputably

governs the payment of premiums, and an unjust enrichment claim will not lie when

it “arises directly from the parties’ agreements.” Jones v. Petland, Inc., No. 2:08-CV-

1128, 2010 WL 536894, at *6 (S.D. Ohio Feb. 11, 2010); see also Wuliger v. Mfrs Life

Ins. Co., 567 F.3d 787, 799–800 (6th Cir. 2009) (“[T]he payment of premiums to

[defendant] was not a ‘benefit’ conferred on [defendant], but was consideration for

[defendant’s] commitment to insuring the viators’ lives. Accordingly, … an unjust

enrichment claim … would be without merit.”).

That said, alternative pleading is permissible under federal law, meaning that

a party may plead both a breach of contract claim and an unjust enrichment claim,

in the alternative, without negating the validity of either, at least so long as the

existence of a contract claim is in dispute. Ortega v. Wells Fargo Bank, N.A., No.

3:11CV01734, 2012 WL 275055, at *11 (N.D. Ohio Jan. 31, 2012); see also Fed. R. Civ.

P. 8(d). And a claim for unjust enrichment may be maintained despite the existence

of an express contract where there is evidence of fraud, bad faith, or illegality. Res.

Title Agency, Inc. v. Morreale Real Est. Servs., Inc., 314 F. Supp. 2d 763, 772 (N.D.

Ohio 2004).

Here, because the Court allows Jones’s securities fraud claim to proceed, the

existence of a contract is at least arguably in dispute, insofar as rescission is a viable

measure of damages under the securities laws. See Nolfi v. Ohio Ky. Oil Corp., 675

F.3d 538, 550 (6th Cir. 2012) (recognizing that, at least in some circumstances,

rescission is an appropriate measure of damages for a § 10(b) claim (citing Stone v.

Kirk, 8 F.3d 1079, 1092 (6th Cir. 1993))).

As such, at least for the time being, Jones may maintain her unjust enrichment

claim notwithstanding the apparent existence of an insurance contract covering the

“benefit” she allegedly conferred on Ohio National (i.e., her insurance premiums).

That said, the Court also notes that Jones cannot receive double recovery. If she

prevails on her securities fraud claim, her relief likely would lie under that claim,

rather than under unjust enrichment. Conversely, should it become clear that her

fraud claim fails—meaning that the insurance contract is valid—her unjust

enrichment claim likely will fail, as well, at least in the absence of any other bad faith

or inequitable conduct. See Res. Title Agency, Inc., 314 F. Supp. 2d at 772; Sindell v.

Fifth Third Bank, No. 1:18 CV 479, 2019 WL 3318571, at *8 (N.D. Ohio Jan. 24, 2019)

(“Ohio law permits a plaintiff to recover under the theory of unjust enrichment only

when an express contract does not cover the same subject ….”). Either way, it is

difficult to imagine how she would recover on an unjust enrichment theory here (as

in the former case, it would constitute double recovery, and in the latter case, the

claim would fail). Nonetheless, the Court will allow the claim to go forward as an

alternative pleading, at least for now.

CONCLUSION

For the foregoing reasons, the Court GRANTS IN PART and DENIES IN

PART Ohio National’s Motion to Dismiss (Doc. 9) Jones’s Complaint (Doc. 1). In

particular, the Court GRANTS Ohio National’s Motion (Doc. 9) with respect to

Counts II and III of Jones’s Complaint (Doc. 1) and accordingly DISMISSES Count

II WITH PREJUDICE and Count III WITHOUT PREJUDICE. The Court

DENIES Ohio National’s Motion (Doc. 9) in all other respects.

SO ORDERED.

April 15, 2022

DATE DOUGLAS R. COLE \.

UNITED STATES DISTRICT JUDGE

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