Title: HealthSouth Corp. v. Levin

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as HealthSouth Corp. v. Levin, 121 Ohio St.3d 282, 2009-Ohio-584.] 
 
 
 
HEALTHSOUTH CORPORATION, APPELLEE, v. LEVIN,  
TAX COMMR., APPELLANT. 
[Cite as HealthSouth Corp. v. Levin, 121 Ohio St.3d 282, 2009-Ohio-584.] 
Taxation — Personal property — R.C. 5711.26 — Application for final 
assessment requesting reduction in taxable value and refund — Deliberate 
or bad-faith reporting by taxpayer of fictitious assets does not bar refund 
of resultant overpayment of personal-property tax — R.C. 5711.26 
requires refund of overpayment — Commissioner has no discretion to 
refuse based on taxpayer’s bad faith or lack of mistake — Estoppel does 
not apply to bar refund. 
(No. 2007-2281 — Submitted December 16, 2008 — Decided  
February 17, 2009.) 
APPEAL from the Board of Tax Appeals, No. 2005-A-1386. 
__________________ 
O’CONNOR, J. 
{¶1} 
In this personal-property tax case involving tax year 2002, the Tax 
Commissioner appeals from a decision of the Board of Tax Appeals (“BTA”) that 
granted appellee, HealthSouth Corporation, a substantial reduction in the taxable 
value of personal property in 19 Ohio taxing districts.  That reduction would lead 
to significant refunds of property taxes. 
{¶2} 
Pursuant to R.C. 5711.26, HealthSouth filed an application for 
final assessment requesting the reductions.  The commissioner issued final 
assessment certificates without making the requested reductions, explaining that 
HealthSouth had not adequately documented its request. 
{¶3} 
Reversing the commissioner, the BTA stated that HealthSouth had 
presented sufficient evidence of value to justify the reductions.  The BTA did not, 
SUPREME COURT OF OHIO 
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however, specifically address the commissioner’s objections to HealthSouth’s 
evidence,  and it did not address the commissioner’s argument that the refund 
claim was legally or equitably barred. 
{¶4} 
In its appeal to this court, the commissioner challenges 
HealthSouth’s entitlement to refunds on two grounds. 
{¶5} 
First, the commissioner argues that the refund claim was barred 
because the excessive tax payments in this case did not occur as the result of 
good-faith error or mistake.  The commissioner points to evidence that former 
HealthSouth managers, as part of a scheme to inflate corporate income and assets 
to attract investors, entered fictitious assets on the company’s books that were 
then reported on property tax returns.  HealthSouth’s claim seeks to remove the 
fictitious assets from the tax assessment and thereby obtain a refund of 
overpayments.  The commissioner argues that the deliberately false reporting of 
the assets should defeat HealthSouth’s claim as a matter of law and equity. 
{¶6} 
Second, the commissioner renews his contention that HealthSouth 
failed to provide sufficient documentation of the amount of taxable value that was 
fraudulently reported on the company’s original return for 2002. 
{¶7} 
We find no support for the commissioner’s first argument in the 
Ohio statutes and the case law.  We hold that the property tax statutes do not 
authorize the commissioner or the BTA to refuse to reduce a tax assessment on 
the grounds that the excess taxable value was reported as part of an accounting 
fraud.  Additionally, we hold that the circumstances presented do not justify 
recognizing estoppel as a bar to HealthSouth’s claim.  Because the correction and 
refund claim were not barred as a matter of law, the BTA was obligated to 
determine whether HealthSouth had submitted sufficient evidence to document 
the fictitious and fraudulent assets originally reported in Ohio taxing districts.  
The BTA failed to make that determination. Accordingly, we vacate the BTA’s 
January Term, 2009 
3 
decision and remand to the BTA to evaluate the evidence in light of the 
commissioner’s objections. 
Relevant Background 
The Fraud and Fictitious Assets 
{¶8} 
On March 19, 2003, the Securities and Exchange Commission 
filed suit against HealthSouth and its chairman, Richard M. Scrushy, claiming that 
HealthSouth had deliberately overstated its earnings by at least $1.4 billion in 
1999.  Within weeks, nearly a dozen current and former HealthSouth executives, 
including all five who had served as chief financial officer, pleaded guilty to 
criminal violations of the federal securities laws and related statutes.  In 
conjunction with these events, the corporation’s board of directors established a 
Special Audit Review Committee on March 22, 2003. 
{¶9} 
That committee examined the corporation’s accounting for the 
period 1996 through 2002 and determined that “accounting fraud at HealthSouth 
was by any standard both enormous and complex.”  HealthSouth misstated 
revenues and expenses to inflate earnings, a fraud that involved making over $2.7 
billion in false or unsupported entries in the accounting systems. The concealment 
of revenue inflation involved transfers out of a corporate “suspense account” (an 
account used temporarily for doubtful receipts, disbursements, or discrepancies 
pending their analysis and permanent classification) onto the balance sheets of 
various HealthSouth facilities.  Because the adjustments were so large and 
difficult to account for, the corporation invented more than $1 billion in fictitious 
assets in order to conceal income-statement fraud. 
Removal of the Fictitious Assets 
{¶10} As of December 31, 2001, the tax lien date at issue, HealthSouth 
owned multiple health-care facilities in Ohio, including physical rehabilitation, 
surgery, and sports medicine centers.  It paid personal-property tax on the tangible 
personal property utilized in providing services at those locations. 
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{¶11} For tax year 2002, HealthSouth filed an intercounty return with the 
Tax Commissioner on June 19, 2002. Spreadsheets were submitted with the return 
purporting to detail the assets at the Ohio locations.  The Tax Commissioner 
issued preliminary assessment certificates based on the return on August 12, 
2002.  Those certificates reveal personal property in 19 taxing districts throughout 
Ohio.  Total assessed value equaled $5,262,130. 
{¶12} On August 4, 2004, HealthSouth filed its application for final 
assessment, which sought to correct the tax assessment for 2002 and thereby 
obtain refunds of excess taxes that had been paid with respect to that tax year.  In 
support of the application, HealthSouth submitted a set of spreadsheets called 
“Amended Fixed Assets.”  The application was filed, and the Amended Fixed 
Asset list was prepared by Brian T. Scully, an outside representative associated 
with the accounting firm KPMG, L.L.P.  The underlying business records, 
however, were not submitted.  The method HealthSouth apparently employed in 
making the correction consisted of simply removing from the assessment items 
with a certain designation.1 The application, if accepted, would reduce the total 
assessed value by $2,668,679. 
{¶13} In reviewing the application, the commissioner requested that 
HealthSouth submit “full and detailed journal entries that are reflective of the 
write-off and/or write-down of these assets in Ohio showing that the originally 
reported costs have been written off of the books of HealthSouth Corporation.”  
HealthSouth did not comply.  On July 15, 2005, the commissioner issued final 
assessment certificates along with a cover letter noting “a lack of evidence to 
establish that these items have fully been removed from the assets as required by 
                                                 
1.  The evidence submitted by HealthSouth established that the designation “AP SUMMARY” 
with all capital letters was associated with fictitious assets.  To the extent that HealthSouth also 
sought to remove assets designated “AP Summary” (lower case letters) from the assessment, the 
removal of those assets does not appear to be justified.  The BTA should address this issue on 
remand. 
January Term, 2009 
5 
[generally accepted accounting principles].”  As a result, the final assessment 
certificates reflect a “0 change in list value.” 
{¶14} At the BTA hearing on appeal of the commissioner’s ruling, 
HealthSouth presented the testimony of Michael D. Martin, a vice-president of tax 
who oversees sales, use, and property tax obligations, and a number of exhibits.  
HealthSouth presented the evidence in an attempt to justify its request for 
reduction through revised financial statements and business records.  But the Tax 
Commissioner strenuously objected to Martin’s testimony as relying on hearsay 
and as lacking a foundation of personal knowledge.  The commissioner also 
challenged some exhibits as insufficiently authenticated. 
{¶15} At the conclusion of the BTA hearing, the commissioner advanced 
the theory that HealthSouth’s claim was barred because the fictitious assets were 
reported as part of a deliberate fraud.  The commissioner did not file a brief. 
{¶16} In its decision, the BTA reversed the commissioner.  Without 
specifically addressing the commissioner’s objections to HealthSouth’s evidence, 
the BTA found that HealthSouth had proved its case.  The BTA did not address 
the commissioner’s argument that the claim was barred because of the underlying 
fraud. 
Analysis 
Ohio law does not condition corrective reductions of  
property tax assessments on a good-faith mistake 
{¶17} In his first proposition of law, the commissioner argues that a 
taxpayer’s intentional overreporting of asset values and resultant tax due for the 
purpose of concealing the taxpayer’s own accounting fraud operates to bar any 
refund of the overpaid taxes.  Before we address this argument, we note that 
HealthSouth contends that the Tax Commissioner waived the argument because 
he did not file a brief at the BTA. 
SUPREME COURT OF OHIO 
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{¶18} Under the present circumstances, HealthSouth’s argument has no 
merit.  The Tax Commissioner forcefully presented the argument in a closing 
statement to the BTA.  Although the commissioner did not follow up by filing a 
brief, that does not mean he waived or abandoned the argument.  When a party 
before the BTA files no brief at all, that omission does not justify the conclusion 
that the party has abandoned arguments that it had previously advanced during the 
BTA hearing.2   We thus turn to the merits of the commissioner’s argument. 
{¶19} Our review of the property tax statutes leads us to conclude that the 
rights to have an assessment corrected and to receive a refund of property taxes do 
not depend on good faith by the taxpayer in filling out the original property tax 
return.  Under Ohio law, the process consists of several steps.  First, the 
assessment is corrected, and any deficiency or excess in relation to prior 
assessments is noted.  The corrected assessment is then certified to the county 
auditor.  R.C. 5711.26.  When there is an excess, county officials take action that 
leads to a refund or to a credit against future taxes.  R.C. 5711.32(A)(1) and 
319.36.  At neither stage does the law condition relief on the taxpayer’s good 
faith, nor does the law confer discretion on officials to deny the taxpayer relief on 
those grounds. 
{¶20} Of particular importance in this context is the mandatory language 
of R.C. 5711.26.  As noted, R.C. 5711.26 specifically requires that the 
commissioner “shall” issue a final assessment certificate when a taxpayer timely 
applies for one.  This mandatory language was enacted in 1982 and superseded 
court decisions that had recognized the commissioner’s discretion to decline to act 
on such an application – a refusal that would allow the preliminary assessment to 
become final without the corrections the taxpayer desired. Am.Sub.H.B. No. 379, 
                                                 
2.  By contrast, the omission of an argument from a party’s brief may be deemed to waive that 
argument. E. Liverpool v. Columbiana Cty. Budget Comm., 116 Ohio St.3d 1201, 2007-Ohio-
January Term, 2009 
7 
139 Ohio Laws, Part II, 2589, 2620; see Michelin Tire Corp. v. Kosydar (1975), 
45 Ohio App.2d 107, 108, 74 O.O.2d 126, 341 N.E.2d 626, paragraph four of the 
syllabus (under former R.C. 5711.26, commissioner “ha[d] discretion whether to 
make a final assessment”). 
{¶21} By requiring the commissioner to finally assess when the taxpayer 
asks him to do so – and thereby removing his discretion to say no – the General 
Assembly intended that the commissioner may not refuse to correct an assessment 
unless the reason for the refusal is listed in the statute.  See Avco Corp. v. 
Limbach (1990), 51 Ohio St.3d 147, 149, 555 N.E.2d 284 (taxpayer’s failure to 
file formal “claims for deduction from book value” did not justify denying final 
assessment, because R.C. 5711.26 does not state such a basis as a ground for 
denial). 
{¶22} The foregoing discussion establishes that the out-of-state cases the 
commissioner cites are not apposite.  Ex parte HealthSouth Corp. (Ala.2007), 978 
So.2d 745, 751 (“the words ‘error’ and ‘mistake’ are not consistent with dishonest 
acts”); HealthSouth Corp. v. Waterbury (Mar. 13, 2008), Conn.Super. Nos. 
CV054011048, 
CV054010916, 
CV054010807, 
CV054002794, 
and 
CV054006234, 2008 WL 853304 (HealthSouth not entitled to mandamus 
compelling tax officials to remove personal property from tax lists, because 
officials had discretion to determine whether “error” existed).  Quite simply, the 
language of the Ohio statutes materially differs from those of foreign 
jurisdictions:  property tax refunds in Ohio do not depend on finding an “error” or 
“mistake” by the taxpayer. 
Estoppel does not apply in this case 
{¶23} The Tax Commissioner frankly acknowledges that his proposition 
of law can properly be seen as invoking an “accounting fraud estoppel.”   He 
                                                                                                                                     
5505, 876 N.E.2d 575, ¶ 3, citing Household Fin. Corp. v. Porterfield (1970), 24 Ohio St.2d 39, 
46, 53 O.O.2d 22, 263 N.E.2d 243. 
SUPREME COURT OF OHIO 
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seeks support for his position not from any language in the statutes, but from 
other tax cases in which, he claims, courts have applied an estoppel-like 
reasoning. 
{¶24} The case law militates against recognizing estoppel in this case.  In 
Gen. Motors Corp. v. Limbach (1993), 67 Ohio St.3d 90, 93, 616 N.E.2d 204, this 
court declined to apply “equitable recoupment” because “we have not applied 
equitable principles to tax matters.” 3  See Columbus S. Lumber Co. v. Peck 
(1953), 159 Ohio St. 564, 569, 50 O.O. 457, 113 N.E.2d 1 (as an administrative 
agency, the BTA “does not have equitable jurisdiction”). 
{¶25} Moreover, the case law does not support recognizing estoppel in 
this case even if that doctrine were generally applicable in tax matters.  The Tax 
Commissioner relies on four cases in which this court is said to have applied 
“estoppel principles” in tax cases.  Two of the cases, Youngstown Sheet & Tube 
Co. v. Lindley (1988), 38 Ohio St.3d 232, 527 N.E.2d 828, and Lyden Co. v. 
Tracy (1996), 76 Ohio St.3d 66, 666 N.E.2d 556, addressed sales-tax issues under 
R.C. 5739.16(B).  Both are inapposite, because they merely construe and apply 
statutory language to the circumstances of the particular case before the court. 
{¶26} The other cases – NLO, Inc. v. Limbach (1993), 66 Ohio St.3d 389, 
613 N.E.2d 193, and Ormet Corp. v. Lindley (1982), 69 Ohio St.2d 263, 23 
O.O.3d 257, 431 N.E.2d 686 – presented situations in which high-level tax 
officials repeatedly assured a taxpayer, in writing and over a period of decades, 
that particular property was exempt.  Then the commissioner reversed himself and 
issued a retroactive assessment.  In striking down the assessment, this court in 
each case invoked the concept of “ ‘administrative practice’ ” having “ 
‘persuasive weight’ ” in the court’s determining how to apply the law during a 
given period.  NLO at 395, 613 N.E.2d 193; Ormet at 266, 23 O.O.3d 257, 431 
                                                 
3.  Because relief under tax statutes is not equitable in character, the “clean hands” doctrine does 
not apply. 
January Term, 2009 
9 
N.E.2d 686, both quoting Recording Devices, Inc. v. Bowers (1963), 174 Ohio St. 
518, 520, 23 O.O.2d 150, 190 N.E.2d 258.  The commissioner insists that these 
cases involve an estoppel doctrine that may be applied against the taxpayer, but 
that notion is mistaken.  The doctrine of “administrative practice” advanced in 
Ormet and NLO constitutes a very narrow exception to the rule that estoppel does 
not generally apply in tax cases.  Ormet, 69 Ohio St.2d at 265, 23 O.O.3d 257, 
431 N.E.2d 686. The doctrine  applies against the state when the state has 
interpreted the law in favor of a particular taxpayer in writing and has adhered to 
that interpretation over an extended period of time, but later corrects its 
interpretation and attempts to assess taxes retroactively in accordance with the 
new interpretation. Id. at 266, 23 O.O.3d 257, 431 N.E.2d 686. By contrast to 
Ormet and NLO, it is the taxpayer in this case who requests correction of an 
assessment that was based on its own original report, and no past administrative 
practice is at issue.  As a result, Ormet and NLO are simply not apposite. 
{¶27} The commissioner also relies on William Bayley Co. v. Lindley 
(Mar. 28, 1979), Clark App. No. 1308, 1979 WL 208325.  In that case, a taxpayer 
had a demand note on its books to which it had assigned a value of over $1.6 
million, but the taxpayer did not report the note on its intangible-property tax 
return.  When the commissioner issued an assessment on the note, the taxpayer 
protested, arguing that the assigned value was not the actual value, that it had later 
written the note off as bad debt, and that the note had no value when it was on the 
books.  Although the appellate court wanted to avoid “recogniz[ing] a corporate 
fraud upon the public,” the court appears to have placed primary reliance on the 
doctrine that “[t]he assignment of book value is prima facie evidence of true 
value” in deciding that the taxpayer had not discharged its burden of establishing 
the worthlessness of the note.  Bayley does not support applying estoppel under 
the circumstances presented here. 
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{¶28} Nor does the present case fit the standard pattern of estoppel based 
on fraud.  The government is not the primary victim of the fraud in this case.  
Indeed, in the short term, the taxing districts benefited from the overpayment of 
taxes.  By contrast, innocent shareholders were induced to invest in HealthSouth 
based on the representation that the corporation had more income and greater 
assets than it actually possessed.  The former HealthSouth management has 
already defrauded these investors once.  If the government is allowed to escape an 
obligation to refund, those persons may be further victimized by the failure of the 
company to recover the overpayment. 
{¶29} The argument has been made that innocent investors in a corporate 
enterprise assume the risks of their investment, even those risks arising from 
corporate wrongdoing. C. Boise, Playing with Monopoly Money:  Phony Profits, 
Fraud Penalties and Equity (2005), 90 Minn.L.Rev. 144, 201.  The flaw in this 
theory lies in its incompatibility with the main purpose behind securities laws, 
which is “ ‘ “to substitute a philosophy of full disclosure for the philosophy of 
caveat emptor.” ’ ”  Cent. Bank of Denver, N.A. v. First Interstate Bank of 
Denver, N.A. (1994), 511 U.S. 164, 171, 114 S.Ct. 1439, 128 L.Ed.2d 119, 
quoting Affiliated Ute Citizens of Utah v. United States (1972), 406 U.S. 128, 151, 
92 S.Ct. 1456, 31 L.Ed.2d 741, quoting Secs. & Exchange Comm. v. Capital 
Gains Research Bur. (1963), 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237.  
Although it is certainly true that investors in the equity markets might be 
victimized by corporate wrongdoing, they do not thereby “assume the risk” of the 
resulting losses in a legal or equitable sense. 
The BTA did not explain how HealthSouth sustained its burden of proof 
{¶30} Although HealthSouth may obtain a refund if it proves its case, the 
BTA’s decision failed to address whether HealthSouth did prove its case.  When a 
taxpayer appeals a determination of the commissioner to the BTA, the 
commissioner’s determination is presumed to be correct, and the taxpayer must 
January Term, 2009 
11 
shoulder the burden of rebutting that presumption.  See Shiloh Automotive, Inc. v. 
Levin, 117 Ohio St.3d 4, 2008-Ohio-68, 881 N.E.2d 227, ¶ 16 (the taxpayer bears 
the burden “to show the manner and extent of the error in the Tax 
Commissioner’s final determination” and to demonstrate that the commissioner’s 
findings are “clearly unreasonable or unlawful”). 
{¶31} HealthSouth presented evidence of its entitlement to a reduction 
with its return, through its refund claim, and at the BTA.  The commissioner 
found the evidence insufficient and raised significant objections to the evidence 
presented at the BTA.  In particular, the commissioner asserted that the 
documentation presented did not show that fictitious assets were ever created or 
that the accounting entries reflecting those assets were ever reversed or removed.  
The commissioner also objected to the testimony of the witness at the BTA as not 
competent to authenticate and verify the documentation. 
{¶32} In determining that HealthSouth had proved its case, all the BTA 
said was that “nothing in the record * * * indicate[d] any impropriety in the 
methodology” that HealthSouth used; that HealthSouth “arguably utilized a 
viable, alternative means of establishing the assets that did exist”; and that 
“nothing in the record [indicated] that the amounts sought through the refund 
request were erroneous * * *.” 
{¶33} None of these statements remotely address the questions of 
sufficiency of the evidence raised by the commissioner.  Indeed, the BTA’s 
statements make it appear that the board unlawfully placed the burden on the 
commissioner to show why HealthSouth’s appeal should fail. 
{¶34} We have held that in deciding the appeals before it, the BTA has 
the duty to state what evidence it considered relevant in reaching its 
determination.  Howard v. Cuyahoga Cty. Bd. of Revision (1988), 37 Ohio St.3d 
195, 197, 524 N.E.2d 887.  When the BTA fails to fulfill that duty, the proper 
SUPREME COURT OF OHIO 
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course pursuant to Howard is to remand the case so that the BTA can perform the 
task. 
{¶35} In so doing, we clarify that we do not hold here that the BTA 
reached the wrong conclusion.  As HealthSouth asserts, we do not sit as a “super 
BTA.”  Strongsville Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 112 Ohio St.3d 
309, 2007-Ohio-6, 859 N.E.2d 540, ¶ 22.  Rather, we must defer to the BTA’s 
factual findings.  Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-Ohio-5856, 856 
N.E.2d 954, ¶ 14. 
{¶36} We find only that the BTA’s decision in its current form does not 
properly evaluate the evidence before it in light of the commissioner’s objections.  
Under these circumstances, we hold that the BTA’s fact-finding is incomplete, 
and we therefore vacate its decision and remand the case to the BTA.  On remand, 
the BTA shall complete its fact-finding based upon the existing record.  Because 
the parties have been afforded ample opportunity to present evidence, the BTA 
shall not take additional evidence on remand. 
Conclusion 
{¶37} For all the foregoing reasons, the decision of the BTA must be 
vacated and the case remanded for further proceedings consistent with this 
opinion. 
Decision vacated 
and cause remanded. 
 
MOYER, C.J., and PFEIFER, O’DONNELL, and CUPP, JJ., concur. 
 
LUNDBERG STRATTON and LANZINGER, JJ., concur separately. 
__________________ 
 
LUNDBERG STRATTON, J., concurring. 
{¶38} I agree with the decision to remand this case on the failure of 
HealthSouth to provide sufficient documentation of its assets to justify a refund. 
January Term, 2009 
13 
{¶39} I also reluctantly agree that the language of R.C. 5711.26, as 
amended in 1982, now appears to require the commissioner to issue such a refund 
by removing the commissioner’s  discretion in such cases.  While the majority 
laments the loss to the “innocent investor,” caused by the corporate fraud, I 
believe that the government and taxing districts are  also primary victims of the 
fraud.  While the taxing districts may have temporarily benefited from the 
overpayment of taxes by HealthSouth (and therefore presumably adjusted their 
budgets to reflect the extra income), those same taxing districts, if a refund is 
upheld on remand, will now be forced, in these very difficult economic times, to 
come up with funds to repay those tax benefits received.  And what is worse, 
those funds will go back to a corporation that has admitted to massive fraud. 
{¶40} But since the law seems to tie our hands, these are policy 
arguments that should be directed to the General Assembly so that it may consider 
changing the statute.  Both Alabama in Ex parte HealthSouth Corp. (Ala.2007), 
978 So.2d 745, and Connecticut in HealthSouth Corp. v. Waterbury (Mar. 13, 
2008), Conn.Super. Nos. CV054011048, CV054010916, CV054010807, 
CV054002794, and CV054006234, 2008 WL 853304, denied refunds to 
HealthSouth, in cases almost identical to the one before us now, because of the 
language of their statutes and the discretion afforded their tax officials in cases of 
fraud. 
{¶41} Therefore, I reluctantly agree that the Ohio tax statute does not 
prohibit refunds based on fraud, but agree that the matter should be remanded for 
further proof on the merits. 
 
LANZINGER, J., concurs in the foregoing opinion. 
__________________ 
 
Siegel, Siegel, Johnson & Jennings Co., L.P.A., and Nicholas M.J. Ray, 
for appellee. 
SUPREME COURT OF OHIO 
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Richard Cordray, Attorney General, and Barton A. Hubbard, Assistant 
Attorney General, for appellant. 
______________________