[Cite as Cuyahoga Hts. Local School Dist. v. Palazzo, 2016-Ohio-5137.]
Court of Appeals of Ohio EIGHTH APPELLATE DISTRICT COUNTY OF CUYAHOGA
JOURNAL ENTRY AND OPINION No. 103592
CUYAHOGA HEIGHTS LOCAL SCHOOL DISTRICT PLAINTIFF-APPELLANT
vs.
JOSEPH PALAZZO, ET AL. DEFENDANTS-APPELLEES
JUDGMENT: REVERSED AND REMANDED
Civil Appeal from the Cuyahoga County Court of Common Pleas Case Nos. CV-13-799017 and CV-13-804215
BEFORE: Stewart, P.J., Laster Mays, J., and Celebrezze, J.
RELEASED AND JOURNALIZED: July 28, 2016 ATTORNEYS FOR APPELLANT
Andrew A. Kabat Daniel M. Connell Haber Polk Kabat, L.L.P. 737 Bolivar Road, Suite 4400 Cleveland, OH 44115
ATTORNEYS FOR APPELLEE
Edward O. Patton Miles Welo Mansour Gavin, L.P.A. Northpoint Towers, Suite 1400 1001 Lakeside Avenue Cleveland, OH 44114 MELODY J. STEWART, P.J.:
{¶1} Joseph Palazzo, the information technology director of plaintiff-appellant
Cuyahoga Heights Local School District (the “district”), funneled more than $4 million in
district money into a shell corporation operated by his brother, in turn receiving nearly
$660,000. The Ohio Auditor of State conducted an audit of Palazzo’s transactions and
concluded that defendant-appellee Michelle Protiva participated in Palazzo’s scheme,
receiving payments from the shell corporation in the amount of $73,600 and cell phone
equipment worth $1,389. The district brought claims against Protiva, who had not been
charged with criminal wrongdoing, seeking a civil recovery for a criminal act, fraud,
unjust enrichment, and conversion. The court dismissed the claim for civil recovery for a
criminal act committed by Protiva because the district did not prove that she had a
criminal conviction as a predicate for recovery. A jury awarded the district $1,389 in
damages for conversion of school district property, but rendered verdicts in Protiva’s
favor on the district’s claims for fraud and unjust enrichment.
{¶2} In this appeal, the district argues that the court erred by dismissing its claim
for civil recovery for a criminal act because Protiva had not been convicted of any
criminal offense. The district also complains that the court erred by refusing to allow it
to offer Palazzo’s deposition testimony in lieu of his live testimony (Palazzo is currently
in federal prison) because Palazzo invoked his Fifth Amendment right against
self-incrimination and the court feared that the jury would draw a negative inference from the invocation of that right. Next, the district complains that the court erroneously
permitted Protiva to testify to hearsay statements by Palazzo. Finally, the district
complains that the court erroneously charged the jury on the meaning of “proximate
cause.”
{¶3} We conclude that the court erred by dismissing the district’s claim for civil
recovery for a criminal act. As conceded by Protiva, the statute authorizing a civil
recovery for a criminal act expressly does not require a conviction as a predicate for
recovery. We also conclude that the court erred by refusing to allow the district to read
into evidence Palazzo’s deposition in which he repeatedly invoked his right against
self-incrimination. The remaining assignments of error are moot.
{¶4} The auditor conducted a special audit of the district’s finances for two
purposes: (1) to identify district payments made to vendors related to Palazzo and (2) to
determine whether corresponding goods and services were received by the district in
exchange for those payments. The auditor’s findings relating to Palazzo were offered
into evidence by the district and Protiva did not dispute those findings at trial; she did
dispute the auditor’s findings concerning her involvement in Palazzo’s scheme.
{¶5} The auditor found that the district, through Palazzo, issued 156 checks
totaling $1,629,474 and incurred nine credit card transactions totaling $31,517 to a
corporation named Laptops and More, Inc. Records obtained from the Ohio Secretary of
State showed that Dominick Palazzo, Palazzo’s brother, was the corporation’s registering
agent and incorporator. The documented purposes for the payments authorized by Palazzo included technology support, laptop computers, servers, and other
technology-related items. Palazzo indicated receipt of these goods and services, but none
of those items were actually received by the district. The auditor found that after the
district’s payments were deposited into an account held by Laptops and More, Inc., the
company issued $660,795 in payments to Joseph Palazzo. The auditor found that there
was no apparent business activity for Laptops and More, Inc. other than with the district.
{¶6} With respect to Protiva’s involvement in Palazzo’s scheme, the auditor found
that although she held a “volunteer” position with the district, she received payments
from Laptops and More, Inc. in the amount of $73,600. In addition, the auditor found
that during the period in which Palazzo engaged in his fraud, the district issued payments
to “legitimate” vendors for goods or services unrelated to district operations. Those
goods and services, consisting of equipment, cell phones, accessories, and related service
plans, totaled $76,214, for which Protiva benefitted in the amount of $1,389. Palazzo
was tried and convicted of criminal offenses for his actions, but as of the time of trial in
this case, Protiva was not charged with any criminal offense relating to her employment
by Laptops and More, Inc.
{¶7} Protiva was the sole witness at trial. She testified that her best friend dated
Palazzo and that she grew close to him because of her friend’s relationship. Protiva
testified that in October 2008, Palazzo offered her employment through Laptops and
More, Inc. as his personal assistant, although she did not start receiving a salary until
January 2009. She testified that her work as a personal assistant consisted entirely of running personal errands for Palazzo, such as getting coffee and lunch, picking up
prescriptions, and having his car washed. Protiva also testified that Palazzo gave her
gifts and furniture worth thousands of dollars. Although ostensibly an employee of
Laptops and More, Inc., Protiva did not actually work out of any office provided by the
company. Protiva testified that Palazzo provided her with a cell phone and that she was
available to him by telephone when needed.
{¶8} In January 2009, Protiva began working out of the district’s offices as an
internet technology “volunteer” in addition to working as Palazzo’s personal assistant for
Laptops and More, Inc. She testified that she worked with two other women in the
district’s office who likewise claimed to be volunteers for the district, but who were paid
by Palazzo through Laptops and More, Inc. Protiva spent “maybe three to nine hours a
week” at the district’s office. Although she “was doing a few tasks at the school,” she
spent 80 percent of her time engaged in running personal errands for Palazzo.
{¶9} For the first year of her volunteer work, Protiva testified that no one ever
asked her who she was working for or what she was doing at the district. In January
2010, Palazzo asked Protiva and the other “volunteers” to sign a form that would give
them permission to be on district property. Protiva continued in that capacity until
January 2011, when she was abruptly fired by Palazzo.
{¶10} Protiva testified that Palazzo was lavish with his money and always had the
“best of the best.” Wondering how he could afford to do so while working for the district, Protiva asked him directly — Palazzo told her that he saved money by living with
his parents and that he received a family inheritance that he invested.
{¶11} The district brought a claim against Protiva under R.C. 2307.60, seeking
civil recovery for a criminal act. It alleged that Protiva stole or misappropriated district
funds without the district’s implied or express consent, knowingly and with the purpose to
deprive the district of its property. The district further alleged that this conduct
constituted a theft offense under R.C. 2913.02 and that Protiva stole or misappropriated
funds for her personal benefit in at least the amount identified in the auditor’s report. At
the close of the district’s case-in-chief, the court dismissed that claim on grounds that the
district did not prove that Protiva had been found guilty of any criminal act. The
district’s first assignment of error challenges that ruling.
{¶12} The district based its right of recovery on R.C. 2307.60 and 2307.61. R.C.
2307.60(A)(1) generally authorizes a civil action for damages by anyone injured by a
criminal act:
(1) Anyone injured in person or property by a criminal act has, and may recover full damages in, a civil action unless specifically excepted by law, may recover the costs of maintaining the civil action and attorney’s fees if authorized by any provision of the Rules of Civil Procedure or another section of the Revised Code or under the common law of this state, and may recover punitive or exemplary damages if authorized by section 2315.21 or another section of the Revised Code.
{¶13} When a civil recovery is sought from a person who has committed a theft
offense, R.C. 2307.61(G)(1) states that the trier of fact may determine that “a theft
offense involving the owner’s property has been committed, whether or not any person has pleaded guilty to or has been convicted of any criminal offense * * *.” (Emphasis
added.)
{¶14} At the close of the district’s evidence, the court ruled there could be no civil
recovery for a criminal act unless there was a predicate conviction. The court
acknowledged that precedent from this appellate district and others held contrary to its
position; nevertheless, it relied on a federal district court case as authority for its ruling.
It concluded by saying that “I’ll let some higher Court [sic] sort it out.”
{¶15} The court erred by disregarding precedent. R.C. 2307.61(G)(1) plainly
states that a party’s civil recovery of damages resulting from a theft offense can be
determined by the trier of fact “whether or not any person has pleaded guilty to or has
been convicted of any criminal offense[.]” Not only have we held as much, see Gonzalez
v. Spofford, 8th Dist. Cuyahoga No. 85231, 2005-Ohio-3415, ¶ 27 (“a criminal conviction
of the crime is not a condition precedent to civil liability”), 1 so have other appellate
districts. See, e.g., Citimortgage, Inc. v. Rudzik, 7th Dist. Mahoning No. 13 MA 20,
2014-Ohio-1472, ¶ 27 (“relying on the clear language of R.C. 2307.61(G)(1), we hold
that a criminal conviction is not required.”); H&W Door Co. v. Stemple, 11th Dist.
Portage No. 93-P-0031, 1994 Ohio App. LEXIS 1408, 5 (“It is clear that R.C. 2307.61 is
a civil remedy and that it is available even though the defendant has not pled guilty to, or
been convicted of, any criminal offense in relation to any act involving the owner’s
Gonzalez relied on R.C. 2307.60 for this proposition, but this appears to be a clerical error 1
— the proposition is found in R.C. 2307.61. property.”); Shaw v. Bretz, 3d Dist. Marion No. 9-13-31, 2014-Ohio-3672, ¶ 42 (“no
criminal conviction is required to recover civil damages under R.C. 2307.61.”).
{¶16} When dismissing the district’s claim for civil recovery, the court relied on
Ortiz v. Kazimer, N.D.Ohio No. 1:11 CV 01521, 2015 U.S. Dist. LEXIS 38496 (Mar. 26,
2015), a decision from the United States District Court for the Northern District of Ohio
in which the district court held that a claim of civil liability for criminal conduct failed as
a matter of law because “[r]ecovery depends on the existence of a criminal conviction.”
As relevant to this appeal, Ortiz involved a claim for civil recovery under R.C. 2307.60
for a battery committed by police officers who allegedly used excessive force when
making an arrest. Unlike this case, Ortiz did not involve a theft or willful damage to
property, so R.C. 2307.61 did not apply to that case. The court erred by relying on Ortiz.
{¶17} Acknowledging the clear language of R.C. 2307.61(G)(1), Protiva concedes
that the court erred by concluding that the district had to prove that she had been
convicted of theft as a predicate to recovery. Appellee’s brief at 9. She maintains,
however, that the court’s error in misapplying R.C. 2307.61 does not require reversal
because an independent basis existed for disposing of the civil recovery for a criminal act
claim — that the court could have directed a verdict under Civ.R. 50(A)(4) on grounds
that the district failed to offer evidence that Protiva committed any type of theft offense.
{¶18} “[A] reviewing court is not authorized to reverse a correct judgment merely
because erroneous reasons were assigned as a basis thereof.” State ex rel. Cassels v.
Dayton City School Dist. Bd. of Edn., 69 Ohio St.3d 217, 222, 631 N.E.2d 150 (1994). This precedent might apply in this appeal had the court erroneously directed a verdict on
one basis, but we could find a separate, non-erroneous basis for directing a verdict
existed.
{¶19} The court did not direct a verdict on the civil recovery for a criminal act
claim, nor could the record support the assertion that it did. The court dismissed the
count and made its reason for dismissal clear: “There must be a criminal conviction
before civil liability arises under this section.” Whether the court would have been
correct in directing a verdict on the civil recovery for a criminal act claim would have
required the court to find that reasonable minds could come to but one conclusion on the
evidence, and that conclusion was adverse to the district. See Civ.R. 50(A)(4); Parrish
v. Jones, 138 Ohio St.3d 23, 2013-Ohio-5224, 3 N.E.3d 155, ¶ 16. As posited by
Protiva, that determination would have required the court to state unequivocally that there
was no evidence that she committed a theft offense against the district. The court cited
no evidence of any kind when dismissing the civil recovery for a criminal act claim.
There is no plausible basis for concluding that the court really intended to direct a verdict
on that claim. The first assignment of error is sustained.
{¶20} Although the civil recovery for a criminal act claim is the only claim subject
to appeal and our order reversing the dismissal of that count moots the remaining issues
associated with that count, the district raises an issue on appeal that could recur if it seeks
to retry Protiva: the court erred by refusing to allow the district to introduce Palazzo’s
deposition testimony because it believed that his repeated invocation of his Fifth Amendment right against self-incrimination would prejudice Protiva. We therefore
exercise our discretion to address it. State v. Tucci, 7th Dist. Mahoning No. 01 CA 234,
2002-Ohio-6903, ¶ 18; In re R.A.I., 2d Dist. Miami Nos. 2006 CA 43 and 2006 CA 44,
2007-Ohio-2365, ¶ 11.
{¶21} The district’s complaint named Palazzo as a defendant, along with 25 other
individual defendants (including Protiva) and ten John Doe defendants. Palazzo was
under federal indictment at the time he was deposed in this case. He answered
substantive questions at deposition about Protiva’s involvement by invoking his Fifth
Amendment right to remain silent and not incriminate himself.2 By the time Protiva’s
Those questions were: 2
“Q. Is it true that Laptops and More issued payment to Michelle Protiva, P-R-O-T-I-V-A, in the amount of $73,600 when she was supposed to be working for The School District as an unpaid volunteer within your IT department?”
“Q. Is it true the money paid to * * * Protiva * * * from Laptops and More was actually money that was wrongfully obtained from The School District as a result of your fraudulent transactions and fraudulent schemes?”
“Q. Is it true that Miss Protiva knew about the fraudulent scheme when she was receiving these payments?”
“Q. Is it true that Miss Protiva participated in the fraudulent scheme that you were perpetrating on The School District.”
“Q. Did Miss Protiva * * * knowingly and intentionally make false representations and conceal information from The School District concerning their employment status with The School District and with certain vendors, including Laptops and More?” “Q. Did Miss Protiva * * * falsely represent to The School District that [she] was serving as [a] volunteer in your Technology Services Department when [she was] instead receiving significant compensation from The School District through one of the shell corporations that you had set up.” trial commenced, Palazzo was unavailable to testify because he had pleaded guilty to the
federal indictment and was serving a prison term.3 The district sought to introduce his
deposition testimony so that the jury could hear him invoke his right against
self-incrimination. Protiva argued that the deposition should not be read to the jury
because Palazzo’s assertion of the right might create a negative inference against her.
The court told the district that “whenever a person invokes their Fifth Amendment rights
in my courtroom, I do not permit any of the questions. They take the stand, and they
revoke [sic] their Fifth Amendment rights, and that’s it.” The court said that it would
allow the district to indicate that Palazzo was deposed and invoked his Fifth Amendment
right against self-incrimination. The court further told the district that it would permit
the district to inform the jury during closing argument that “we would have liked to have
asked him this, but he didn’t respond to the questions[.]”
{¶22} The Fifth Amendment to the United States Constitution provides that “no
person * * * shall be compelled in any criminal case to be a witness against himself.”
Although the privilege against self-incrimination would on its face appear to apply only to
criminal proceedings, the courts have also applied the privilege to civil proceedings.
See, e.g., McCarthy v. Arndstein, 266 U.S. 34, 40, 45 S.Ct. 16, 69 L.Ed. 158 (1924)
(upholding the use of the privilege in a bankruptcy proceeding).
Palazzo pleaded guilty in federal court to conspiracy to commit mail fraud, money laundering 3
conspiracy and wire fraud. See United States v. Palazzo, N.D.Ohio No. 1:13-CR-167, 2013 U.S. Dist. LEXIS 84762 (June 14, 2013). {¶23} The courts have not, however, applied the Fifth Amendment as rigidly in
civil cases as they do in criminal cases. Comments regarding a criminal defendant’s
invocation of the right against self-incrimination are prohibited, Griffin v. California, 380
U.S. 609, 614, 85 S.Ct. 1229, 14 L.Ed.2d 106 (1965), but there is no constitutional
impediment to drawing an inference against a party invoking the Fifth Amendment
privilege in a civil case. Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S.Ct. 1551, 47
L.Ed.2d 810 (1976) (“The Fifth Amendment does not forbid adverse inferences against
parties to civil actions when they refuse to testify in response to probative evidence
offered against them * * *.”) “‘While the umbrella of Fifth Amendment guarantees is
broad, the prohibition against compulsory testimony does not relieve a party from
appearing or answering questions in a civil action.’” State ex rel. Verhovec v. Mascio, 81
Ohio St.3d 334, 337, 691 N.E.2d 282 (1998), quoting Tedeschi v. Grover, 39 Ohio
App.3d 109, 111, 529 N.E.2d 480 (10th Dist.1988).
{¶24} The Fifth Amendment right against self-incrimination might be a shield in
criminal cases, but in civil cases it can be a sword turned against the person claiming the
privilege. This is because the rule in civil cases is that an adverse inference may be
drawn against a party who invokes the Fifth Amendment privilege against
self-incrimination. Verhovec; Tedeschi, supra. The inference exists because a witness’s
assertion that the answer to a question might be self-incriminating proves that the witness
engaged in some incriminating activity relative to the question. {¶25} The issue in this case is whether an adverse inference may be drawn against
a party when a nonparty asserts the Fifth Amendment privilege against
self-incrimination.4 Although this is a novel issue in this state, it is widely accepted in
other jurisdictions that the evidentiary use of nonparty witnesses’ invocations of the
privilege against self-incrimination is allowed. See, e.g., Fed. Deposit Ins. Corp. v. Fid.
& Deposit Co. of Md., 45 F.3d 969, 978 (5th Cir.1995); In re Urethane Antitrust
Litigation, D.Kan. MDL No. 1616, 2013 U.S. Dist. LEXIS 3166 (Jan. 8, 2013); Levine v.
March, 266 S.W.3d 426 (Tenn.App.2007); Lentz v. Metro. Prop. & Cas. Ins. Co., 437
Mass. 23, 768 N.E.2d 538 (2002); Nelson v. State, 273 P.3d 608 (Alaska 2012); R.I. Res.
Recovery Corp. v. Van Liew Trust Co., 2012 R.I. Super. LEXIS 167 (R.I. Super. Ct.
2012).
{¶26} These decisions collectively recognize that the use of nonparty invocations
of the privilege against a party do not harm any of the policies underlying the privilege.
The privilege is a personal right that protects only the party subpoenaed to give
testimonial evidence. United States v. Nobles, 422 U.S. 225, 233, 95 S.Ct. 2160, 45
L.Ed.2d 141 (1975); Couch v. United States, 409 U.S. 322, 327, 93 S.Ct. 611, 34 L.Ed.2d
548 (1973). In this case, Palazzo’s invocation of the privilege during his testimony in
this civil case protected his right to refuse to testify against himself — by invoking the
As a named defendant, Palazzo was a “party” in this case. However, by the time trial 4
commenced against Protiva, Palazzo was no longer a party: the district obtained summary judgment against Palazzo in March 2015, and the case against Protiva proceeded to trial in September 2015. privilege to remain silent, prosecutors gained no ability to interrogate him further, nor
could they use Palazzo’s silence as a means of obtaining a criminal conviction.
{¶27} This is not a case where the mere assertion of the privilege imposed an
“unconstitutional cost on the exercise of the privilege.” LaSalle Bank Lake View v.
Seguban, 54 F.3d 387, 390 (7th Cir.1995). That rule does not apply “if the failure to
testify alone were taken as an admission of guilt, without regard to other evidence[.]”
(Emphasis sic.) Id., citing Baxter, 425 U.S. at 318, 96 S.Ct. 1551, 47 L.Ed.2d 810. In
other words:
Baxter did no more than permit an inference to be drawn in a civil case from a party’s refusal to testify. Respondent’s silence in Baxter was only one of a number of factors to be considered by the finder of fact in assessing a penalty, and was given no more probative value than the facts of the case warranted; here, refusal to waive the Fifth Amendment privilege leads automatically and without more to imposition of sanctions.
Lefkowitz v. Cunningham, 431 U.S. 801, 97 S.Ct. 2132, 53 L.Ed.2d 1 (1977), fn. 5.
{¶28} Whether Palazzo’s refusal to answer questions should create an adverse
inference for Protiva depends on the circumstances. The leading case on the issue is
LiButti v. United States, 107 F.3d 110 (2d Cir.1997), where the United States Court of
Appeals for the Second Circuit held that a nonparty’s invocation of the Fifth Amendment
privilege against self-incrimination and the adverse inference to be made from the
invocation of that right was admissible. The court of appeals set forth a list of
non-exclusive factors that the courts should consider when deciding whether to admit
evidence of the invocation of the right: (1) the nature of the relevant relationships; (2) the degree of control of the party over the nonparty witness; (3) the compatibility of the
interests of the party and nonparty witness in the outcome of the litigation; and (4) the
role of the nonparty witness in the litigation. Id. at 123-124.
{¶29} These factors should guide the court’s consideration of whether to admit
evidence of a nonparty’s invocation of the privilege against self-incrimination. In
addition, the court must consider the Rules of Evidence regarding relevancy (Evid.R. 401)
and whether the probative value of the evidence is substantially outweighed by its
prejudicial effect (Evid.R. 403). These considerations are within the court’s discretion to
make, but we note that invocations of the privilege given during sworn deposition
testimony should be considered inherently reliable given the adverse inference that
accompanies the invocation of the right — much like an admission against interest, the
refusal to answer a question by asserting the privilege against self-incrimination is
necessarily an acknowledgment of wrongdoing. Baxter, 425 U.S. at 318, 96 S.Ct. 1551,
47 L.Ed. 810 (1976) (“the Fifth Amendment does not forbid adverse inferences against
parties to civil actions when they refuse to testify in response to probative evidence
offered against them[.]”).
{¶30} This segues into the final issue we consider: whether invocations of the
privilege during depositions are admissible. The district sought to use Palazzo’s
deposition testimony in lieu of his live testimony at trial. That use was permitted by
Civ.R. 32(A)(3)(c), which allows a deposition to be used as evidence against “any party
who was present or represented at the taking of the deposition or who had reasonable notice thereof” if the court finds that the witness is unable to testify because of
“imprisonment.”
{¶31} Protiva argues that Palazzo’s deposition testimony was hearsay, and while it
might ordinarily be admitted under the Evid.R. 804(B)(1) hearsay exception for sworn
deposition testimony by an unavailable witness, the district did not show that Palazzo was
unavailable consistent with Evid.R. 804(A)(5) because it did not attempt to procure his
attendance at trial by “process or other reasonable means” — the record indicates that the
district sought to compel Palazzo’s attendance at trial by way of subpoena.
{¶32} Protiva’s argument on Palazzo’s unavailability ignores that Civ.R. 32(A)
states:
At the trial or upon the hearing of a motion or an interlocutory proceeding, any part or all of a deposition, so far as admissible under the rules of evidence applied as though the witness were then present and testifying may be used against any party who was present or represented at the taking of the deposition or who had reasonable notice thereof[.]
{¶33} The parties were present at the taking of Palazzo’s deposition, so the
deposition was admissible under the rule as though Palazzo had been present and
testifying at trial. Easley v. Dept. of Rehab. & Corr., Ct. of Cl. No. 2010-01221,
2011-Ohio-2623, ¶ 7, fn. 1. The content of his testimony was subject to the proviso that
it be otherwise admissible under the rules of evidence; for example, if Palazzo’s
deposition testimony contained hearsay, that part of his testimony would be inadmissible
unless subject to a hearsay exception. Protiva makes no argument that those portions of
Palazzo’s deposition that the district sought to introduce into evidence were inadmissible under the rules of evidence. On the limited record before us, we see no bar to the
admissibility of Palazzo’s deposition testimony, recognizing that the trial judge has the
discretion to admit evidence. See Evid.R. 104(A).
{¶34} The remaining assignments of error are moot. See App.R. 12(A)(1)(c).
{¶35} Judgment reversed and remanded.
It is ordered that appellant recover of said appellee costs herein taxed.
The court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate issue out of this court directing the common
pleas court to carry this judgment into execution.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of
the Rules of Appellate Procedure.
______________________________________________ MELODY J. STEWART, PRESIDING JUDGE
ANITA LASTER MAYS, J., and FRANK D. CELEBREZZE, JR., J., CONCUR