[Cite as State ex rel. Atty. Gen. v. Vela, 2013-Ohio-1049.]
COURT OF APPEALS LICKING COUNTY, OHIO FIFTH APPELLATE DISTRICT
STATE OF OHIO, EX REL. JUDGES: ATTORNEY GENERAL Hon. Patricia A. Delaney, P.J. Hon. William B. Hoffman, J. Plaintiff-Appellee Hon. Sheila G. Farmer, J.
-vs- Case No. 12-CA-62
MANUAL R. VELA, ET AL. OPINION Defendants-Appellants
CHARACTER OF PROCEEDING: Appeal from the Licking County Court of Common Pleas, Case Nos. 02CV1158/05CV648
JUDGMENT: Affirmed
DATE OF JUDGMENT ENTRY: March 15, 2013
APPEARANCES:
For Plaintiff-Appellee For Defendants-Appellants
VIVIAN P. TATE DAVID A. KOPECH Principal Assistant Attorney General Kopech & O'Grady LLC Charitable Law Section 471 E. Broad St. Suite 2001 150 East Gay Street 23rd Floor Columbus, Ohio 43215 Columbus, Ohio 43215 Licking County, Case No. 12-CA-62 2
Hoffman, J.
{¶1} Defendants-appellants Manual R. Vela, et al. appeal the June 29, 2012
Judgment Entry entered by the Licking County Court of Common Pleas, which
approved and adopted the magistrate’s January 4, 2012 Decision with Findings of Fact
and Conclusions of Law. Plaintiff-appellee is the state of Ohio, ex rel. Attorney General.
STATEMENT OF THE FACTS AND CASE
{¶2} Appellants Manuel Vela and Judy Vela are husband and wife. Together,
the Velas formed Symbiont NFP, Inc. (“NFP”), an Ohio non-profit corporation. Manuel
Vela was the incorporator, director/trustee and administrator of NFP. Judy Vela was
also extremely involved with the corporation, serving as a director/trustee and secretary.
{¶3} NFP contracts with Ohio counties and various states to facilitate foster
home placement, provide training, and provide services for abused, neglected, or
abandoned children. NFP is a private non-custodial agency licensed by the Ohio
Department of Job and Family Services. As a 501(c)(3) public charity, NFP is entitled to
the benefits and privileges afforded to federal tax exempt organizations, charitable
organizations under Ohio common law, and charitable trusts under Ohio R.C. 109.23.
{¶4} The Velas were also majority shareholders in, held ownership interests in,
and/or controlled various other companies which did business with NFP. Those
companies included Symbiont, Inc., a for-profit Ohio corporation which provides
professional services to NFP1; Fairfield Academy, Ltd., an Ohio limited liability company;
Ohio Treatment Alliance (“OTA”), a for-profit Ohio corporation which offers independent
living assistance, a residential center, and therapeutic services for male clientele;
1 The Sybiont name was changed to Apex Mental Health Services. Licking County, Case No. 12-CA-62 3
McVee Holdings, Ltd., a for-profit Ohio corporation which leased vehicles and office
equipment to NFP; and YAFGO, a for-profit Ohio corporation which provided clinical
services to Fairfield Academy and NFP.
{¶5} The Ohio Department of Job and Family Services (“ODJFS”) receives
federal dollars for foster care placement through the Title IV E program. With the
federal funds, ODJFS pays county agencies under contract. The county agencies then
pay the funds to private foster care placement agencies, such as NFP. NFP operated
exclusively on public funds obtained through the Title IV E program.
{¶6} In 1998, ODJFS was audited. ODJFS and the Auditor of State’s Office set
up the parameters of the audit in a document titled “Agreed upon Procedures”. As
ODJFS was responsible for the funds obtained through the federal Title IV E program,
the audit involved twenty five private agencies, including NFP, which received these
federal funds. Certain expenditures of NFP were found to be noncompliant, requiring
repayment to the federal government.
{¶7} The Auditor focused primarily on NFP’s programs and activities during the
1998 calendar year. A draft report was provided to NFP for review and response. NFP,
through its attorney, prepared an extensive reply to the draft audit report, specifically
rejecting the establishment of an independent board. The Auditor found the following
noncompliance issues:
The transfer of Fairfield Academy was not shown to be competitive and favorable
to NFP, and resulted in NFP holding more liabilities than assets. Licking County, Case No. 12-CA-62 4
NFP made loans to several of the Vela’s companies in the amount of $430,000.
Monies for these loans were obtained through NFP’s line of credit. NFP paid the
interest on the amounts drawn against its line of credit.
Vehicle lease agreements made during the 1998 calendar year were not shown
to be favorable to NFP. The lease agreements were never addressed in Board
minutes, the Velas did not abstain from any Board decision related to these
vehicles, and NFP paid $6,605 more than the value of the leased vehicles during
1998.
NFP paid $15,200 of the $16,000 total cost of four seat licenses to the Ohio State
University, but only one seat was in NFP’s name. The remaining three seats
were in the names of employees – Manuel Vela, Judy Vela, and David Morris.
NFP, McVee, and OTA shared employees. However, NFP could not show how
the costs for these employees were allocated between the companies based
upon the time the workers actually spent on the business of each company. NFP
overpaid its share for these employees by $28,000.
OTA operated Fairfield Academy before the company was transferred to NFP.
During that time, OTA became indebted to YAFGO. NFP paid $15,742 of OTA’s
debt after it acquired Fairfield Academy. There was no evidence NFP was liable
for the debt.
NFP, although tax exempt, paid taxes on a number of purchases.
Companies owned by the Velas shared board members and employees with
NFP. Every NFP board member was an employee of NFP and/or a board Licking County, Case No. 12-CA-62 5
member or employee of at least one other company owned or operated by
Manuel Vela.
{¶8} The final audit report revealed NFP improperly spent $382,063. ODJFS
was required to repay this amount to the federal government.
{¶9} The State of Ohio, ex rel. the Attorney General, filed a complaint against
the Velas for disregard and exploitation of NFP. The Attorney General alleged, because
NFP is a charitable trust, all assets of the organization were to be used for the express
charitable purposes. The Attorney General sought removal of the Velas as the directors
of NFP; the imposition of a constructive trust; and restitution of any assets or benefits
wrongfully transferred to the Velas. The complaint named NFP as a necessary party,
but did not allege claims against NFP.
{¶10} The Velas filed a motion for summary judgment. The Attorney General
filed a motion for partial summary judgment, seeking a declaration NFP is a charitable
trust as a matter of law. The trial court granted the Attorney General’s motion for partial
summary judgment, declaring NFP a charitable trust as a matter of law. The matter
proceeded to bench trial before the magistrate. Following the presentation of evidence,
the magistrate found the Velas were unjustly enriched by assets belonging to the trust.
The magistrate issued her decision with findings of fact and conclusions of law on
January 4, 2012. The Velas filed objections to the magistrate’s decision. Via Judgment
Entry filed June 29, 2012, the trial court overruled the Vela’s objections and approved
and adopted the magistrate’s decision.
{¶11} It is from this judgment entry the Velas appeal, raising the following
assignments of error: Licking County, Case No. 12-CA-62 6
{¶12} “I. THE TRIAL COURT ERRED BY SUSTAINING PLAINTIFF’S MOTION
FOR PARTIAL SUMMARY JUDGMENT AND OVERRULING DEFENDANT’S MOTION
FOR SUMMARY JUDGMENT.
{¶13} “II. THE TRIAL COURT ERRED BY IMPROPERLY ADMITTING THE
AUDIT REPORT AS AN EXCEPTION TO THE HEARSAY RULE PURSUANT TO
EVID.R. 801(D)(2).
{¶14} “III. THE TRIAL COURT ERRED BY FINDING THAT PLAINTIFF MET
THE PROPER BURDEN OF PROOF.
{¶15} “IV. THE TRIAL COURT ERRED BY FINDING THAT THE INDIVIDUAL
DEFENDANTS WERE UNJUSTLY ENRICHED.”
STANDARD OF REVIEW
{¶16} Summary judgment proceedings present the appellate court with the
unique opportunity of reviewing the evidence in the same manner as the trial court.
Smiddy v. The Wedding Party, Inc. (1987), 30 Ohio St.3d 35, 36, 506 N.E.2d 212. As
such, this Court reviews an award of summary judgment de novo. Grafton v. Ohio
Edison Co. (1996), 77 Ohio St.3d 102, 105, 671 N.E.2d 241.
{¶17} Civ.R. 56 provides summary judgment may be granted only after the trial
court determines: 1) no genuine issues as to any material fact remain to be litigated; 2)
the moving party is entitled to judgment as a matter of law; and 3) it appears from the
evidence that reasonable minds can come to but one conclusion and viewing such
evidence most strongly in favor of the party against whom the motion for summary
judgment is made, that conclusion is adverse to that party. Temple v. Wean United, Inc.
(1977), 50 Ohio St.2d 317, 364 N.E.2d 267. Licking County, Case No. 12-CA-62 7
{¶18} It is well established the party seeking summary judgment bears the
burden of demonstrating that no issues of material fact exist for trial. Celotex Corp. v.
Catrett (1987), 477 U.S. 317, 330, 106 S.Ct. 2548, 91 L.Ed.2d 265. The standard for
granting summary judgment is delineated in Dresher v. Burt (1996), 75 Ohio St.3d 280
at 293, 662 N.E.2d 264: “ * * * a party seeking summary judgment, on the ground that
the nonmoving party cannot prove its case, bears the initial burden of informing the trial
court of the basis for the motion, and identifying those portions of the record that
demonstrate the absence of a genuine issue of material fact on the essential element(s)
of the nonmoving party's claims. The moving party cannot discharge its initial burden
under Civ.R. 56 simply by making a conclusory assertion the nonmoving party has no
evidence to prove its case. Rather, the moving party must be able to specifically point to
some evidence of the type listed in Civ.R. 56(C) which affirmatively demonstrates the
nonmoving party has no evidence to support the nonmoving party's claims. If the
moving party fails to satisfy its initial burden, the motion for summary judgment must be
denied. However, if the moving party has satisfied its initial burden, the nonmoving party
then has a reciprocal burden outlined in Civ.R. 56(E) to set forth specific facts showing
there is a genuine issue for trial and, if the nonmovant does not so respond, summary
judgment, if appropriate, shall be entered against the nonmoving party.” The record on
summary judgment must be viewed in the light most favorable to the opposing party.
Williams v. First United Church of Christ (1974), 37 Ohio St.2d 150, 309 N.E.2d 924. Licking County, Case No. 12-CA-62 8
I
{¶19} In their first assignment of error, the Velas contend the trial court erred in
granting summary judgment in favor of the Attorney General and declaring NFP a
charitable trust as a matter of law.
{¶20} R.C. 109.23 defines “charitable trust” as follows:
{¶21} “(A) “Charitable trust” means any fiduciary relationship with respect to
property arising under the law of this state or of another jurisdiction as a result of a
manifestation of intention to create it, and subjecting the person by whom the property is
held to fiduciary duties to deal with the property within this state for any charitable,
religious, or educational purpose.
{¶22} “(B) “Charitable trust” includes the fiduciary relationship, the entity serving
as trustee, the status as trustee, the corpus of such trust, or a combination of any or all
of such meanings, regardless of the primary meaning of any use of the term, that is
necessary in any circumstances to effect the purposes of such sections.
{¶23} “* * *
{¶24} “(D) The fact that any person sought to be charged with fiduciary duties is
a corporation, association, foundation, or any other type of organization that has, under
judicial decisions or other statutes, been distinguished from a charitable trust does not
provide a presumption against its being a charitable trust as defined in this section.”
R.C. 109.23.
{¶25} Pursuant to R.C. 109.23, in order to prove the existence of a charitable
trust, a party must establish three elements: 1) a fiduciary relationship with respect to
property arising under the law of this state or of another jurisdiction; 2) as the result of a Licking County, Case No. 12-CA-62 9
manifestation of intention to create the trust; 3) which subjects an individual by whom
the property is held to fiduciary duties to deal with this property within this state for any
charitable, religious, or educational purpose.
{¶26} The Velas assert there was neither “property” nor a “manifestation of
intention” to create a “fiduciary relationship” with respect to the property; therefore, NFP
cannot be a charitable trust. We disagree.
{¶27} NFP’s Articles of Incorporation provide, in relevant part:
A. Said corporation is organized for charitable and educational
purposes to establish, organize, and operate a network of foster care
boarding homes, group boarding homes and residential facilities to care
for children and adolescents who have been determined to be abused,
neglected, unruly, or dependent. To provide orientation and support
services necessary to families seeking to become certificated or retain
certification as foster care providers; develop relationships between
families and placed youth; education and training in child development,
parenting, crisis management, financial management for the child in
placement, emancipation and independent living skills, support structures,
and to provide an environment that promotes the proper development, and
the emotional, psychological, and/or physical treatment or support
necessary for the individual in foster care to be reunited with his/her family
or enter into an independent living status; and the making of distributions
to organizations under Section 501(C)(3) of the Internal Revenue Code * *
*and to do all things necessary or incidental to the purpose herein stated. Licking County, Case No. 12-CA-62 10
{¶28} “[T]he manifestation of intention to create a trust may be by written or
spoken words or by conduct. No particular form of words or conduct is necessary for the
manifestation of intention to create a trust.” Brown v. Holloway (1981), 2nd Dist. No. CA
6689, citing Restatement of Trusts 2d Section 24, Restatement of Trusts 2d, Section
351, comment b, applied to charitable trusts. The plain language of NFP’s Articles
contemplates a fiduciary relationship between NFP and the children and families for
whom the non-profit was created to serve.
{¶29} NFP’s Articles also provide:
B. To receive and maintain a fund or funds of real or personal
property, or both, and subject to the restrictions and limitations hereinafter
set forth, to use and apply the whole or any part of the income therefrom
and the principal thereof exclusively for charitable and education purposes
either directly by contributions to organizations that qualify as exempt
organizations* * *. (Emphasis added).
{¶30} We find NFP’s Articles manifest the non-profit’s intention to create a trust.
The Articles specify NFP will use the funds it receives “exclusively for charitable and
educational purposes.” Additionally, NFP was established as a 501(C)(3) non-profit
organization. In order to be recognized as such, NFP was required to be organized and
operated exclusively for one or more of the purposes specified in Internal Revenue
Code 501(C)(3). Charitable and educational purposes are specified purposes. As a
result of its status as a 501(C)(3), NFP is exempt from federal income taxes and must
file IRS Form 990 rather than the traditional corporate tax form. Further, NFP is
prohibited from conferring any private benefit on any member, director, officer, Licking County, Case No. 12-CA-62 11
shareholder, or other private individual. NFP acknowledges this prohibition in its
Articles:
C. No part of the net earnings of the corporation shall inure to the
benefit of any member, trustee, officer of the corporation, or any private
individual (except that reasonable compensation may be paid for services
rendered to or for the corporation affecting one or more of its purposes),
and no member, trustee, officer of the corporation, or any private
individual shall be entitled to share in the distribution of any of the
corporate assets on dissolution of the corporation. No substantial part of
the activities of the corporation shall be the carrying on of propaganda, or
otherwise attempting, to influence legislation, and the corporation shall not
participate in or intervene in * * * any political campaign on behalf of any
candidate for public office.
{¶31} NFP’s Articles expressly prohibit the Velas from using funds from the non-
profit for any purpose other than charitable and educational purposes.
{¶32} In a case involving a purported charitable trust, the Court must use liberal
and broad rules of construction. Barton v. Parrott (1985), 25 Ohio Misc.2d 8, 495 N.E.2d
973. The law of equity favors a charitable trust. Danner v. Shanafel (1953), 159 Ohio St.
5, 110 N.E.2d 772.
{¶33} Based upon the foregoing, we find the trial court did not err in granting
summary judgment in favor of the Attorney General. We further find the trial court did
not err in declaring NFP a charitable trust as a matter of law.
{¶34} The Vela’s first assignment of error is overruled. Licking County, Case No. 12-CA-62 12
II
{¶35} In their second assignment of error, the Velas contend the trial court erred
in admitting the audit report as an exception to the hearsay rule pursuant to Evid. R.
801(D)(2). Specifically, the Velas argue the report contains hearsay statements made
by persons outside the agency contrary to Evid. R. 803(8), and the report does not
constitute a business record of the Auditor of State.
{¶36} As a public agency, the Auditor of State is required to obtain information
through audits of public offices and private agencies pursuant to R.C. 117.28 and
117.29. The audit report relative to NFP was compiled and prepared by the Auditor’s
employees in furtherance of the Auditor’s statutory duties. The information obtained
and utilized by the Auditor’s employees came directly from NFP and its officers,
directors and employees. The audit report also included findings based upon NFP’s
business records. Accordingly, we find no error in the trial court’s admission of the
report.
{¶37} Assuming, arguendo, the trial court erred in admitting the audit report, we
would find the Velas were not prejudiced by such error.
{¶38} Evid.R. 103 provides, in relevant part:
{¶39} “(A) Effect of erroneous ruling
{¶40} “Error may not be predicated upon a ruling which admits or excludes
evidence unless a substantial right of the party is affected* * *.”
{¶41} Civ.R. 61 sets forth the harmless error rule in civil cases, providing in
pertinent part that no error or defect in any ruling is “ground for granting a new trial or for
setting aside a verdict or for vacating, modifying or otherwise disturbing a judgment or Licking County, Case No. 12-CA-62 13
order, unless refusal to take such action appears to the court inconsistent with
substantial justice.”
{¶42} “Generally, in order to find that substantial justice has been done to an
appellant so as to prevent reversal of a judgment for errors occurring at the trial, the
reviewing court must not only weigh the prejudicial effect of those errors but also
determine that, if those errors had not occurred, the jury or other trier of the facts would
probably have made the same decision.” Hallworth v. Republic Steel Corp. (1950), 153
Ohio St. 349, 91 N.E.2d 690, paragraph three of the syllabus. If hearsay evidence is
objected to and permitted to go to the jury, the judgment must be reversed unless it
affirmatively appears in the record that the party is not prejudiced. Westinghouse Elect.
Corp. v. Dolly Madison Leasing & Furniture Corp. (1975), 42 Ohio St.2d 122, 326
N.E.2d 651; Wilson v. Barkalow, 11 Ohio St. 471, 1860 WL 83; Lowe v. Lehman, 15
Ohio St. 179, 186.
{¶43} We find the Velas were not prejudiced. The information contained in the
audit report by the Auditor of State was received directly from NFP and its officers,
directors and employee. Such individuals testified at trial.
{¶44} The Vela’s second assignment of error is overruled.
III
{¶45} In their third assignment of error, the Velas submit the trial court erred in
finding they breached their fiduciary duties.
{¶46} To prevail on a breach of fiduciary duty claim, “a party must show the
existence of a fiduciary relationship, failure to comply with a duty accorded that
relationship, and damages proximately caused by that failure.” Morgan v. Ramby, 12th Licking County, Case No. 12-CA-62 14
Dist. Nos. CA2010–10–095 & CA2010–10–101, 2012–Ohio–763, ¶ 25; Keybank Natl.
Assoc. v. Guarnieri & Secrest, P.L.L., 7th Dist. No. 07 CO 46, 2008–Ohio–6362, ¶ 33. A
party must prove a breach of fiduciary duty by clear and convincing evidence. See,
e.g., R.C. 1701.59.
{¶47} Upon review of the entire record, we find the trial court did not err in
finding the Velas breached their fiduciary duties. The record is replete with evidence of
self-dealing by the Velas.
{¶48} The evidence reveals NFP made loans in the amount of $430,000 to
companies owned and managed by the Velas. NFP used funds from its line of credit
and was required to pay interest on the amounts drawn. Fiduciary duties include the
duty “to keep trust property separate and not commingle it with the trustee’s personal
property.” Jones v. Elsea (2003), 4th Dist. No. 02-CA-27, 2003-Ohio-4900 at 18
(Citation omitted). Additionally, the Velas as directors transferred Fairfield Academy to
NFP, which resulted in NFP holding more liabilities than assets. OTA operated Fairfield
Academy before the company was transferred to NFP. During that time, OTA became
indebted to YAFGO. NFP paid $15,742 of OTA’s debt to YAFGO after acquiring
Fairfield Academy. There was no evidence NFP was liable for the debt. A fiduciary has
a duty to make the trust property productive. Id.
{¶49} Further, vehicle lease agreements made during the 1998 calendar year
were not shown to be favorable to NFP. The lease agreements were never addressed
in Board minutes, the Velas did not abstain from any Board decision related to these
vehicles, and NFP paid $6,605 more than the value of the leased vehicles during 1998.
NFP paid $15,200 of the $16,000 total cost of four seat licenses to the Ohio State Licking County, Case No. 12-CA-62 15
University, but only one seat was in NFP’s name. The remaining three seats were in
the names of employees – Manuel Vela, Judy Vela, and David Morris.
{¶50} In light of the aforementioned evidence, we find the trial court did not err in
finding the Velas breached their fiduciary duty to NFP.
{¶51} The Velas’ third assignment of error is overruled.
IV
{¶52} In their final assignment of error, the Velas submit the trial court erred in
finding each of them individually had been unjustly enriched.
{¶53} The elements of an unjust enrichment claim are: “(1) a benefit conferred
by a plaintiff upon a defendant; (2) knowledge by the defendant of the benefit; and (3)
retention of the benefit by the defendant under circumstances where it would be unjust
to do so without payment.” Hambelton v. R.G. Barry Corp. (1984), 12 Ohio St.3d 179,
183, 465 N.E.2d 1298. Unjust enrichment is inapplicable to gifts or any officious act.
Wendover Rd. Property Owners Assn. v. Kornicks (1985), 28 Ohio App.3d 101, 502
N.E.2d 226, syllabus.
{¶54} Although claiming their actions were prudent, reasonable, and in the best
interest of NFP, the Velas acknowledged they used NFP funds to purchase Christmas
and birthday gifts, and country club memberships, and to pay party expenses related to
their for-profit companies, as well as to pay credit cards, parking tickets, and personal
reimbursements. The NFP Articles require any income be used for charitable and
educational purposes. We find there was sufficient evidence for the trial court to
conclude the Velas were unjustly enriched by using NFP funds for their own personal
interests. Licking County, Case No. 12-CA-62 16
{¶55} Under the “Assignments of Error” section of their Brief, the Velas set forth
four alleged errors for our review. After arguing their fourth assignment of error, the
Velas assert a fifth error under Section III, subsection C of their Brief. Specifically, the
Velas contend the trial court had no legal authority for ordering “[n]either Manuel nor
Judy Vela shall serve as an employee with authority to bind any charitable trust doing
business in the State of Ohio nor shall either serve as trustee or officer of any charitable
trust doing business in the State of Ohio.”
{¶56} The Velas failed to separately assign as error the trial court’s restriction on
their future employment as required by App. R.16(A)(3). Accordingly this Court will not
address this argument.
{¶57} The Velas’ fourth assignment of error is overruled.
{¶58} The judgment of the Licking County Court of Common Pleas is affirmed.
By: Hoffman, J.
Delaney, P.J. and
Farmer, J. concur
s/ William B. Hoffman _________________ HON. WILLIAM B. HOFFMAN
s/ Patricia A. Delaney _________________ HON. PATRICIA A. DELANEY
s/ Sheila G. Farmer __________________ HON. SHEILA G. FARMER Licking County, Case No. 12-CA-62 17
IN THE COURT OF APPEALS FOR LICKING COUNTY, OHIO FIFTH APPELLATE DISTRICT
STATE OF OHIO, EX REL. : ATTORNEY GENERAL : : Plaintiff-Appellee : : -vs- : JUDGMENT ENTRY : MANUAL R. VELA, ET AL. : : Defendants-Appellants : Case No. 12-CA-62
For the reasons stated in our accompanying Opinion, the judgment of the Licking
County Court of Common Pleas is affirmed. Costs to Appellants.
s/ William B. Hoffman _________________ HON. WILLIAM B. HOFFMAN
s/ Patricia A. Delaney _________________ HON. PATRICIA A. DELANEY
s/ Sheila G. Farmer __________________ HON. SHEILA G. FARMER