Case Title: Perrysburg Twp. v. Rossford

Citation: 2004-Ohio-4362

Docket Number: 20022025

State: ohio

Court: Ohio Supreme Court

Date: 2004-09-08T00:00:00Z

Document:
[Cite as Perrysburg Twp. v. Rossford, 103 Ohio St.3d 79, 2004-Ohio-4362.] 
 
 
PERRYSBURG TOWNSHIP, APPELLANT AND CROSS-APPELLEE, v. CITY OF 
ROSSFORD ET AL.; ROSSFORD ARENA AMPHITHEATER AUTHORITY, APPELLEE 
AND CROSS-APPELLANT. 
[Cite as Perrysburg Twp. v. Rossford, 103 Ohio St.3d 79, 2004-Ohio-4362.] 
Securities — Definition of “security” — R.C. 1707.01(B), construed — Test in 
Reves v. Ernst & Young adopted for determining whether document is a 
security. 
(No. 2002-2025 — Submitted November 18, 2003 — Decided September 8, 
2004.) 
APPEAL and CROSS-APPEAL from the Court of Appeals for Wood County, Nos.  
WD-02-010 and WD-02-011, 149 Ohio App.3d 645, 2002-Ohio-5498. 
__________________ 
SYLLABUS OF THE COURT 
1. The first sentence of R.C. 1707.01(B) provides the general definition of a 
security, which can be applied to any certificate or instrument to determine 
whether it is a security, and the second sentence provides a list of 
certificates and instruments that are presumptively securities. 
2. To determine whether a particular note is a security, we adopt the test set forth 
in Reves v. Ernst & Young (1990), 494 U.S. 56, 66-67, 110 S.Ct. 945, 108 
L.Ed.2d 47. 
__________________ 
PFEIFER, J. 
{¶ 1} The issue in this case is whether an instrument providing an 
unconditional promise to pay a specified sum of money on a date certain can be a 
“security” pursuant to R.C. 1707.01(B).  To determine whether a particular 
promissory note is a security, we adopt the test set forth in Reves v. Ernst & 
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Young (1990), 494 U.S. 56, 66-67, 110 S.Ct. 945, 108 L.Ed.2d 47.  Applying this 
test to the facts stated in Perrysburg Township’s complaint, we conclude that 
Perrysburg Township may be able to prove that the note in this case is a security, 
and, therefore, we affirm the judgment of the court of appeals on that issue. 
{¶ 2} In 1999, the city of Rossford passed an ordinance authorizing and 
instructing its law director to establish Rossford Arena Amphitheater Authority 
(“RAAA”), a nonprofit corporation, to finance, construct, own, operate, and 
maintain a public sports arena and amphitheater.  Mark Zuchowski, the mayor of 
Rossford, was named president of RAAA. 
{¶ 3} On May 17 and June 29, 1999, Zuchowski attended regularly 
scheduled meetings of appellant and cross-appellee, Perrysburg Township, and 
directly solicited Perrysburg Township to contribute public funds toward the 
arena project.  On June 29, 1999, Zuchowski, on behalf of RAAA, entered into an 
agreement with Perrysburg Township.  Under the terms of the agreement, 
Perrysburg Township agreed to contribute $5 million to RAAA, and RAAA was 
to repay the contribution, plus eight percent interest, over two years.  The sports 
arena and amphitheater were never built, and  RAAA defaulted on the agreement. 
{¶ 4} Perrysburg Township sued RAAA, Rossford, and Zuchowski, 
claiming, among other things, securities violations.  The trial court dismissed the 
securities-violations claims under Civ.R. 12(B)(6), holding that the note involved 
was not a security under R.C. 1707.01(B).  Perrysburg Township appealed, and 
the court of appeals reversed the trial court’s judgment dismissing the securities-
violations claims against RAAA.  Even though Perrysburg Township was 
successful in having the trial court’s dismissal of its securities-violations claims 
against RAAA reversed, it appealed from the court of appeals’ judgment on that 
issue because it did not agree with the court’s reasoning.  RAAA cross-appealed 
from the court of appeals’ judgment.  The cause is now before the court upon the 
acceptance of a discretionary appeal and cross-appeal. 
January Term, 2004 
3 
{¶ 5} An order granting a Civ.R. 12(B)(6) motion to dismiss is subject to 
de novo review.  See Cincinnati v. Beretta U.S.A. Corp., 95 Ohio St.3d 416, 
2002-Ohio-2480, 768 N.E.2d 1136, ¶ 4-5.  In reviewing whether a motion to 
dismiss should be granted, we accept as true all factual allegations in the 
complaint.  Mitchell v. Lawson Milk Co. (1988), 40 Ohio St.3d 190, 192, 532 
N.E.2d 753. 
{¶ 6} At the time the note in question was executed, R.C. 1707.01(B) 
defined “security” as “any certificate or instrument that represents title to or 
interest in, or is secured by any lien or charge upon, the capital, assets, profits, 
property, or credit of any person or of any public or governmental body, 
subdivision, or agency.  It includes * * * promissory notes, all forms of 
commercial paper, evidences of indebtedness, bonds, debentures, * * * [and] any 
instrument evidencing a promise or an agreement to pay money * * *.”  
Am.Sub.H.B. No. 695, 147 Ohio Laws, Part III, 5380, 5381. 
{¶ 7} Critical to resolving the issue in this case is determining the 
purpose of the second sentence of the definition.  Did the General Assembly 
intend the second sentence of the definition to expand upon the first sentence, or 
did it intend the second sentence to be restricted by the limitations in the first 
sentence?  If, as we stated in dicta in Gutmann v. Feldman, 97 Ohio St.3d 473, 
2002-Ohio-6721, 780 N.E.2d 562, ¶ 15, we “interpret the list of examples in the 
second sentence as providing specific examples of what forms such securities, as 
defined by the first sentence, may take,” then the second sentence is surplusage.  
(Emphasis sic.)  Instead, we conclude that the second sentence is substantive.  In 
interpreting statutes, “it is the duty of this court to give effect to the words used, 
not to delete words used or to insert words not used.”  Cleveland Elec. Illum. Co. 
v. Cleveland (1988), 37 Ohio St.3d 50, 524 N.E.2d 441, paragraph three of the 
syllabus.  If the General Assembly had intended the second sentence to be a mere 
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list of certificates and instruments that may be securities, it would have said so 
directly, and to reach that conclusion we would have to “insert words not used.” 
{¶ 8} Instead, the General Assembly began the second sentence with the 
words “It includes.”  The pronoun “it” refers to “security.”  Thus, the sentence 
means, “[‘Security’] includes * * * promissory notes, all forms of commercial 
paper, evidences of indebtedness, bonds, debentures, * * * [and] any instrument 
evidencing a promise or an agreement to pay money * * *.”  See Williams v.  
Waves, Cuts, Colour & Tanning, Inc. (1994), 92 Ohio App.3d 224, 229-230, 634 
N.E.2d 692.  Accordingly, we conclude that the first sentence of R.C. 1707.01(B) 
provides the general definition of a security, which can be applied to any 
certificate or instrument to determine whether it is a security, and the second 
sentence provides a list of certificates and instruments that are presumptively 
securities.1 
{¶ 9} “The Ohio Securities Act, generally referred to as Ohio Blue Sky 
Law, was adopted on July 22, 1929 to prevent the fraudulent exploitation of the 
investing public through the sale of securities.”  In re Columbus Skyline 
Securities, Inc. (1996), 74 Ohio St.3d 495, 498, 660 N.E.2d 427.  This goal is best 
accomplished through a broad definition of “securities.”  Id.  See, also, Reves, 494 
U.S. at 60-61, 110 S.Ct. 945, 108 L.Ed.2d 47; Securities & Exchange Comm. v. 
W. J. Howey Co. (1946), 328 U.S. 293, 298-299, 66 S.Ct. 1100, 90 L.Ed. 1244 
(definitions under securities act should be flexible rather than static “to meet the 
countless and variable schemes devised by those who seek the use of the money 
of others on the promise of profits”). 
{¶ 10} We agree with the court of appeals’ conclusion that the agreement 
in this case is a promissory note because it is an instrument containing the written 
                                                 
1. The General Assembly does not often use this two-sentence approach to define terms.  See R.C. 
307.041(A), 2935.29, 3733.01(L), and 4779.01(I). 
 
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promise of RAAA to repay Perrysburg Township the definite sum of $5 million 
plus eight percent interest per annum.  See Black’s Law Dictionary (7th Ed.1999) 
1085-1086.  Because the agreement is a promissory note, which is one of the 
items listed in the second sentence of R.C. 1707.01(B), it is presumptively a 
security. 
{¶ 11} To determine whether a particular note is a security, we adopt the 
test set forth in Reves, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47.  The Reves 
test has been increasingly adopted by our sister states.  Kenneth L. MacRitchie, Is 
a Note a “Security”?:  Current Tests Under State Law (2001), 46 S.D.L.Rev. 369, 
380-387.  Adoption of this test fills a gap in Ohio law and promotes uniformity in 
securities law.  See Columbus Skyline Securities, 74 Ohio St.3d at 499, 660 
N.E.2d 427. 
{¶ 12} The Reves test begins with “a presumption that every note is a 
security.”  Reves, 494 U.S. at 65, 110 S.Ct. 945, 108 L.Ed.2d 47.  This 
presumption is consistent with our holding that the items listed in the second 
sentence of R.C. 1707.01(B) are presumed to be securities.  The Reves test next 
recognizes that certain instruments that are commonly called “notes” are not 
securities.  The “types of notes that are not ‘securities’ include ‘the note delivered 
in consumer financing, the note secured by a mortgage on a home, the short-term 
note secured by a lien on a small business or some of its assets, the note 
evidencing a “character” loan to a bank customer, short-term notes secured by an 
assignment of accounts receivable, or a note which simply formalizes an open-
account debt incurred in the ordinary course of business (particularly if, as in the 
case of the customer of a broker, it is collateralized).’ ”  Reves, 494 U.S. 65, 110 
S.Ct. 945, 108 L.Ed.2d 47, quoting Exchange Natl. Bank of Chicago v. Touche, 
Ross & Co. (C.A.2, 1976), 544 F.2d 1126, 1138.  The note in this case is not one 
of these exceptions. 
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{¶ 13} Finally, the Reves test uses the family-resemblance test to 
determine whether the note in question closely resembles the notes from the 
above list that are not securities.  Reves, 494 U.S. at 66-67, 110 S.Ct. 945, 108 
L.Ed.2d 47.  This case-by-case determination is consistent with our preference to 
avoid “an all-inclusive definition” of security.  State v. Silberberg (1956), 166 
Ohio St. 101, 104, 1 O.O.2d 221, 139 N.E.2d 342. 
{¶ 14} The family-resemblance test is a four-part test, designed to 
ascertain the economic realities of the instrument in question.  First, the 
transaction is examined to determine the motivations of the parties entering into 
the agreement.  Second, the plan of distribution of the instrument is examined.  
Third, the reasonable expectations of the investing public are considered.  And 
finally, it is determined whether there are any factors that reduce the risk of the 
instrument, thereby rendering securities protections unnecessary.  Reves, 494 U.S. 
at 66-67, 110 S.Ct. 945, 108 L.Ed.2d 47. 
{¶ 15} We now apply the four-part family-resemblance test to the note in 
this case.  Under the first factor, we examine the motivations of the parties 
involved.  When the motivations are investment, the note appears to be a security; 
when the motivations are commercial, the note appears to be a nonsecurity.  
Pollack v. Laidlaw Holdings, Inc. (C.A.2, 1994), 27 F.3d 808, 812; Reves, 494 
U.S. at 66, 110 S.Ct. 945, 108 L.Ed.2d 47.  In this case, RAAA entered into the 
agreement to fund the construction of the sports arena and amphitheater, so its 
motivations were commercial.  By contrast, Perrysburg Township entered into the 
agreement as an investment.  Consequently, this factor does not help us to 
determine whether the note is a security.  See Bass v. Janney Montgomery Scott, 
Inc. (C.A.6, 2000), 210 F.3d 577, 585 (“the first factor is a washout, since the 
motivation prompting the transaction on Technigen’s end is one typical in 
commercial loan transactions, that is, an effort to raise interim funds to launch a 
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new enterprise, but from Bass’s perspective looks more like a transaction for 
profit”). 
{¶ 16} The second factor, the plan of distribution, indicates that the note is 
not a security.  When there is “ ‘common trading for speculation or investment,’ ” 
a note is more likely to be a security.  Reves, 494 U.S. at 66, 110 S.Ct. 945, 108 
L.Ed.2d 47, quoting Securities & Exchange Comm. v. C.M. Joiner Leasing Corp. 
(1943), 320 U.S. 344, 351, 64 S.Ct. 120, 88 L.Ed. 88.  Unique agreements, 
negotiated one-on-one between sophisticated entities, are not often securities.  
Marine Bank v. Weaver (1982), 455 U.S. 551, 560, 102 S.Ct. 1220, 71 L.Ed.2d 
409.  In this case, there is no evidence that the note was to be commonly traded, 
and it is clear that it was a private agreement between two sophisticated entities. 
{¶ 17} The third factor of the test, the reasonable expectations of the 
trading public, falls in favor of the note’s being a security.  The question to ask 
here is what a reasonable member of the public would have believed, not what 
Perrysburg Township believed.  See McNabb v. Securities & Exchange Comm. 
(C.A.9, 2002), 298 F.3d 1126, 1132.  Taking the assertions in Perrysburg 
Township’s complaint as true, Zuchowski called the note an “investment.”  This 
would have led a reasonable member of the public to believe that the note was an 
investment. 
{¶ 18} Finally, the lack of risk-reducing factors suggests that the note was 
a security.  When there are other protections that reduce the risk of an instrument, 
the application of securities protections is unnecessary.  Reves, 494 U.S. at 67, 
110 S.Ct. 945, 108 L.Ed.2d 47.  In this case, Perrysburg Township is not 
protected by any other regulatory scheme.  Furthermore, the note is 
uncollateralized and uninsured. 
{¶ 19} In this case, the family-resemblance test does not establish that the 
note closely resembles notes that are not securities; therefore, the presumption 
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that the note is a security holds.  Accordingly, the Civ.R. 12(B)(6) motion should 
not have been granted.  We affirm the judgment of the court of appeals. 
Judgment affirmed. 
 
MOYER, C.J., GORMAN, F.E. SWEENEY, LUNDBERG STRATTON, O’CONNOR 
and O’DONNELL, JJ., concur. 
ROBERT H. GORMAN, J., of the First Appellate District, sitting for 
RESNICK, J. 
__________________ 
 
John P. Donahue; Roetzel & Andress and Thomas S. Zaremba, for 
appellant and cross-appellee. 
 
Shumaker, Loop & Kendrick, L.L.P., Peter R. Silverman, Mark D. 
Wagoner Jr. and Dana R. Ewing, for appellee and cross-appellant. 
 
Jim Petro, Attorney General, Douglas R. Cole, State Solicitor, Stephen P. 
Carney, Senior Deputy Solicitor, and Peter M. Thomas and Michael R. Gladman, 
Assistant Solicitors, for amicus curiae, Attorney General of Ohio. 
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