U.S. Supreme Court holds that Enforcers of Security Interests in Nonjudicial Foreclosures are not “Debt Collectors” under Federal Fair Debt Collection Practices Act

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

(A Watch Your Language Series Article)

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will uphold language in commercial agreements, unless it is contrary to statutory law or public policy. Because of this judicial deference to commercial language, you must “say what you mean, precisely, or a judge will decide what you meant.”

Saying what you mean, precisely, is as important in drafting statutes and ordinances as it is in commercial agreements. As a general rule, courts will also uphold clear and unambiguous statutory language. “Statutes clear in their terms need no interpretation; they simply need application. If the …language of a statute reveals … a meaning which is clear, unequivocal and definite… the statute must be applied accordingly." Provident Bank v. Wood (1973). Alternatively, ambiguous statutes will be interpreted by judges who may or may not uphold the meaning intended by the legislative authority who drafted such statutes.

In the recent case of Obduskey v. McCarthy & Holthus LLP, 138 S. Ct. 2710 (2018), the United States Supreme Court determined that the Fair Debt Collection Practices Act (“FDCPA” or the “Act”) was not clear and unequivocal, and accordingly, the court decided what Congress meant by the term “debt collector.”

The facts of the case are simple enough; the law, not so much.

Facts of the Case

In 2007, Dennis Obduskey (the petitioner) bought a home in Colorado with a $329,940 loan secured by a mortgage on the property. Approximately two years later, Mr. Obduskey defaulted on the loan. In 2014, Wells Fargo Bank, N. A., the servicer for the lender hired a law firm, McCarthy & Holthus LLP (the respondent) to act as its agent in carrying out a nonjudicial foreclosure.

McCarthy first mailed Mr. Obduskey a letter that stated McCarthy had been instructed to commence foreclosure against the property, disclosed the amount past due and outstanding on the loan and identified the creditor. Mr. Obduskey responded with a letter disputing the amount of the debt, and requesting written verification of the debt in accordance with §1692g(b) of the FDCPA. McCarthy did not provide any such verification. Instead, the law firm initiated a nonjudicial foreclosure action in accordance with Colorado state law.  

Mr. Obduskey then filed a lawsuit in federal court alleging that the McCarthy law firm had violated the FDCPA by failing to comply with the verification procedure and other provisions and procedures required by the Act. The federal district court dismissed the suit on the ground that the law firm was not a “debt collector” within the meaning of the Act, so the verification procedure and other relevant Act requirements did not apply. On appeal, the Court of Appeals for the Tenth Circuit affirmed the dismissal. Mr. Obduskey then petitioned the United States Supreme Court for certiorari (an order by which a higher court reviews a decision of a lower court).

Applicable Law

To better understand the Obduskey decision, a quick primer on nonjudicial foreclosures and the Act is in order.

Nonjudicial foreclosure. As well explained by the court in Obduskey: “When a person buys a home, he or she usually borrows money from a lending institution, such as a bank. The resulting debt is backed up by a ‘mortgage’—a security interest in the property designed to protect the creditor’s investment… The loan likely requires the homeowner to make monthly payments. And if the homeowner defaults, the mortgage entitles the creditor to pursue foreclosure, which is ‘the process in which property securing a mortgage is sold to pay off the loan balance due’… Every state provides some form of judicial foreclosure: a legal action initiated by a creditor in which a court supervises the sale of the property and distribution of the proceeds. These procedures offer various protections for homeowners, such as the right to notice and to protest the amount a creditor says is owed...About half the States also provide for what is known as nonjudicial foreclosure, where notice to the parties and sale of the property occur outside court supervision.” Ohio is not one of the states that permits nonjudicial foreclosures.

The FDCPA- The Fair Debt Collection Practices Act is the main federal law that governs debt collection practices. Generally, the FDCPA prohibits debt collectors from using abusive, unfair or deceptive practices to collect debts. Specifically, the Act imposes a multitude of requirements on “debt collectors.” For example, pursuant to §1692d of the Act, debt collectors may not use or threaten violence, or make repetitive phone calls. Nor (pursuant to §1692e of the Act) can debt collectors make false, deceptive or misleading representations in connection with a debt, like misstating a debt’s “character, amount, or legal status.” And, pursuant to §1692g(b) of the Act, if a consumer disputes the amount of a debt, a debt collector must cease collection until it “obtains verification of the debt” and mails a copy of such verification to the debtor.

There is also a separate subsection of the Act (§1692f(6)), that prohibits a debt collector from: “Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if— (A) there is no present right to possession of the property . . . ; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement.”

What is a “debt collector” for purposes of the Act?  Pursuant to §1692a(6) of the Act , a “debt collector” is “any person . . . in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts.” This definition, however, goes on to say that “[f]or the purpose of section 1692f(6)…the term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests.”

The Issue before the Court: The issue faced by the court in Obduskey was essentially; what did Congress mean by enacting, in effect, a two-part definition of “debt collector” in the Act. In other words, does the “2^nd part of the definition” (the last sentence) mean that one principally involved in the enforcement of security interests is not a debt collector (except regarding section 1692f(6) of the Act)? If so, numerous other provisions of the Act, like the verification requirement would not apply to the McCarthy law firm. Or, does the 2^nd part of the definition simply reinforce the fact that those principally involved in the enforcement of security interests are subject to §1692f(6), in addition to the Act’s other provisions?

Holding/Court Analysis of Obduskey: The United States Supreme Court in Obduskey held that a security interest enforcer engaged in no more than nonjudicial foreclosure proceedings is not a “debt collector” under the FDCPA, except for the limited purpose of §1692f(6) of the Act. In other words, the vast majority of the Act does not apply to nonjudicial foreclosures.

Most decisive and important to the court was the text of the Act itself. The court interpreted the first part of the Act’s definition of debt collector as the Act’s “primary definition,” and the last sentence of the definition as the “limited purpose” part of the definition. The court in Obduskey then reasoned that if security interest enforcers were meant to be included in the primary definition, there would have been no need for the addition of a limited purpose definition that specifically addresses security interest enforcers (in nonjudicial foreclosures).

As explained in the case syllabus, “The limited purpose definition says that “[f]or the purpose of Section 1692f(6)” a debt collector ‘also includes’ a business, like McCarthy, ‘the principal purpose of which is the enforcement of security interests.’ §1692a(6) (emphasis added). This phrase, particularly the word ‘also,’ strongly suggests that security interest enforcers do not fall within the scope of the primary definition. If they did, the limited purpose definition would be superfluous.”

The court also pointed out that its interpretation is supported by legislative history, which suggests that “the Act’s present language was the product of a compromise between competing versions of the bill, one which would have totally excluded security-interest enforcement from the Act, and another which would have treated it like ordinary debt collection.”

Mr. Obduskey made a number of legal arguments which were summarily dismissed by the court. He also expressed a “floodgates argument” claiming that the court’s decision will open a loophole, permitting creditors and their agents to engage in a host of abusive practices. The court seemed concerned enough about this argument to issue a warning, by stating, “This is not to suggest that pursuing nonjudicial foreclosure is a license to engage in abusive debt collection practices.” However, the Court was not swayed enough to change its decision. In fact, the court countered that it would not be the role of the Supreme Court of the United’s States to curtail any collateral damage from its decision. Rather, “states can…guard against such practices”, and “Congress may choose to expand the reach of the FDCPA.”  According to the court, the United States Supreme Court’s only job is to “enforce the statute that Congress enacted.”

Moral of the Story

For legislators, “say what you mean, precisely, or a judge will decide what you meant.” And, remember that judges do not always get it right.  Even Justice Sotomayor, in her concurring opinion in Obduskey recognized this adage by stating: “this is a close case, and today’s opinion does not prevent Congress from clarifying this statute if we have gotten it wrong.”

For debt collectors, heed the court’s warning (“enforcing a security interest does not grant an actor blanket immunity from the mandates of the Act”), rather than focus on its holding. Also keep in mind that there is no penalty for adhering to consumer protection statutes that may not be applicable, even if you are an attorney or other security interest enforcer involved in a nonjudicial foreclosure. What would be the harm, for example in using the “verification of the debt language” called for in the Act, when there is no requirement to do so? Remember that debt collection protections are also governed at the state and local level, in spite of a limited loophole in the FDCPA.

If you are an enforcer of a security interest in a judicial foreclosure (required in Ohio and other states), note that the holding of Obduskey v. McCarthy & Holthus LLP does not apply to you. As clearly stated by the court in Obduskey, “Whether those who judicially enforce mortgages fall within the scope of the primary definition [of “debt collector”] is a question we can leave for another day…for here we consider nonjudicial foreclosure.” In other words, since enforcers of security interests in judicial foreclosures were not deemed excluded from the Act’s definition of “debt collector”, to be prudent, you should consider yourself included in the definition, and consequently, subject to all provisions of the Act.

Another Local Point of Sale Ordinance in Ohio Held to be Unconstitutional

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

(Criminal Penalties and Lack of Warrant Procedure Held to be Key Failings of Bedford, Ohio’s Former Point of Sale Ordinance)

The U.S. District Court for the Northern District of Ohio has held in Pund v. City of Bedford, Case No.1:16-cv-1076 (N.D. Ohio Sept. 10, 2018) that a prior version of the point of sale inspection ordinance of the City of Bedford (suburb of Cleveland), as well as its rental inspection provisions, were unconstitutional, in violation of the Fourth Amendment of the U.S. Constitution.

This is the second Ohio federal court to strike down ordinances of this type. Earlier this year, the U.S. District Court for the Southern District of Ohio in Thompson v. City of Oakwood, Case No. 3:16-cv-169 (S.D. Ohio Feb 9, 2018) ruled that the point of sale ordinance of the City of Oakwood (suburb of Dayton) was unconstitutional.

Point of Sale Ordinances

While this type of ordinance can take many forms, the most common makes it unlawful to transfer ownership of any real estate, or lease to a new tenant, without having obtained a pre-sale inspection of the property under the applicable municipal code. The pre-sale inspection procedure usually requires the property owner to complete an application, schedule and appear for an inspection of the property with a code official, pay an inspection fee, and correct or otherwise address identified violations of the municipality’s fire, zoning, building, and/or property maintenance codes in order to obtain a certificate of occupancy authorizing the property’s sale or rental. The violation of pre-sale inspection requirements in this type of ordinance is usually punishable as a misdemeanor.

Municipalities usually defend their point of sale ordinances as valuable tools to increase the value of properties within their borders and ensure such properties and the residents occupying the same will be and remain safe. While these ordinances often contain a “criminal component”, municipalities rarely enforce the criminal penalties, but deem them necessary to cause compliance.

Notwithstanding the laudable intentions behind this type of point of sale ordinance, and the usual reluctance of municipalities to enforce the criminal penalties associated therewith, the United States District Court for the Northern District of Ohio in Pund has followed the lead of the Southern District of Ohio (in Thompson) in  holding point of sale ordinances with criminal penalties, but without warrant procedures (such as those formerly enacted in Oakwood, Ohio and Bedford, Ohio) unconstitutional violations of the Fourth Amendment of the U.S. Constitution.

Bedford’s Former Point of Sale/Rental Inspection Ordinance

Bedford’s former Point of Sale Inspection Ordinance required homeowners to obtain a Certificate of Inspection (“Certificate”) before selling their home. A Certificate, valid for twelve months, was issued after a building official inspected “all structures or premises used for dwelling purposes and all secondary or accessory structures to determine whether such structures or premises conform[ed] to the provisions of th[e] code.” On inspection, the building official could enter the property at any reasonable time and inspect all areas of the home, including basements, bathrooms, electrical equipment, roofing, walks and driveways. Obtaining a Certificate required homeowners to apply for and consent to a warrantless inspection of the home and to pay an inspection fee ranging from $50 to $200. If the home did not pass inspection, either (i) the homeowner was required to perform repairs before the sale, or, (ii) the buyer could deposit money in escrow to ensure payment for repairs to be made after the sale. Homeowners that violated the ordinance or refused an inspection were guilty of a misdemeanor and could be fined and imprisoned.                             

Similarly, Bedford’s rental inspection ordinance required landlords to schedule a warrantless inspection of their rental units every two years, or each time a new tenant was secured. A landlord was to obtain a Certificate in order to lease its property to a tenant. Landlords paid an inspection fee ranging from $20 to $50 per unit, and failure to comply could result in criminal penalties including fines and imprisonment.

It is important to note that approximately two months after the plaintiffs’ action was filed, the City of Bedford passed an ordinance that repealed the then existing pre-sale inspection ordinance and replaced it with a new one. The new ordinance adds an administrative warrant process for inspections and eliminates criminal penalties.

Background of Pund v. City of Bedford

The plaintiffs filed a legal action against the City of Bedford on behalf of Ken Pund  (an area landlord who was forbidden from selling a home he owns to his daughter, in which she resides); John Diezic (a homeowner who was prevented from selling his home in Bedford due to minor cracks in his asphalt driveway); and (1) all other individuals and businesses that have been subjected to Bedford’s point of sale inspections between September 10, 2014 and January 30, 2017 (and paid the requisite inspection fees); and (2) all individuals and businesses that have been subjected to rental inspections between September 10, 2014 and February 14, 2017 (and paid the requisite rental inspection fees).

Basically, the plaintiffs in Pund sought: 1) an injunction against enforcement of the ordinances containing a warrantless inspection requirement; 2) a declaratory judgment that Bedford’s point of sale and rental inspection ordinances were unconstitutional (and that defendant City of Bedford has been/continues to be unjustly enriched as a result therefrom); and 3) restitution of the inspection fees plaintiffs paid pursuant to such ordinances.

Defendant’s Arguments

The City of Bedford put forth two basic arguments: 1) it was entitled to summary judgment on plaintiffs’ claims because its amended ordinance rendered such claims, moot; and 2) it did not commit any constitutional violation because the plaintiffs consented to the inspections.

The Court’s Analysis in Pund V. City of Bedford

As with the court in Thompson, the court in Pund agreed with the defendant’s argument that the amended ordinance rendered the plaintiffs’ injunction claims, moot. Citing precedent (prior cases on point), the court in Pund explained that “[W]hen the issues presented are no longer ‘live’ or the parties lack a legally cognizable interest in the outcome,” a case (or case issue) becomes moot. And, since Bedford’s amended ordinance provided plaintiffs the injunctive relief they sought; the court in Pund declared the injunction portion of the plaintiffs’ claims no longer live, and therefore, moot. However, further citing precedent, the court  clarified that “[W]here a claim for injunctive relief is moot, relief in the form of damages for a past constitutional violation is not affected.”  In other words, the Pund court held that plaintiffs retained a “backward-looking right to challenge the original law”; in terms of their claims for a declaratory judgement and monetary damages relating to the prior ordinance. The City of Bedford tried to argue away plaintiffs’ right to a declaratory judgement (leaving simply, a claim for monetary damages), however, the court in Pund disagreed, explaining that “Declaratory relief is part and parcel of [a] claim for monetary relief, which is live.”

To address the defendant’s argument that there was no constitutional violation, and accordingly no damages to be awarded (because plaintiffs consented to the search, and accordingly did not violate the Fourth Amendment), the court in Pund first summarized the general rule of (and quoted precedent with regard to) such amendment, before evaluating whether or not the general exception to the general rule (namely, that consented-to searches do not require a warrant) applied.

The court in Pund stated, as a general rule, that “The Fourth Amendment protects people in the privacy of their homes and against ‘unreasonable searches and seizures’;” and that searches of the home by the government “conducted outside the judicial process, without prior approval by a judge or a magistrate judge [e.g., via a warrant], are per se unreasonable subject only to a few specifically established and well-delineated exceptions.” As you may recall from high school government class, “Plain view”, “search incident to a lawful arrest”, “exigent circumstances” and “voluntary consent” are some of the more common “warrant exceptions,” where a warrantless search or seizure would still be considered reasonable and not run afoul of the Fourth Amendment.

The defendant and its counsel in Pund were certainly aware of the “consent exception,” and in fact used it to justify their argument for summary judgement in their favor. The plaintiffs, however countered that “voluntary consent to inspection, necessary for the City’s compliance with the Fourth Amendment, was impossible for any homeowner to give under the terms of the ordinance because the only alternative to consent was criminal penalty.”

In holding for the plaintiffs, the court in Pund  first recognized and agreed that voluntary consent to search is in fact a well-established exception to the Fourth Amendment’s warrant requirement, by simply stating that, “A homeowner’s voluntary consent to a search satisfies the government’s Fourth-Amendment obligations.” However, just as general rules of law always have exceptions, exceptions to exceptions are just as common, and ruled the day in Pund v City of Bedford. Quoting precedent (establishing an exception to the consent exception) by the court in Thompson, and others before it, the court in Pund agreed with the plaintiffs and held that “consent given under threat of criminal penalty can never be deemed voluntary.”  Applying the facts to the law, the Pund Court summarized that the Bedford inspection ordinances were unconstitutional because they required a homeowner to obtain a certificate in order to sell a home, which in turn allowed a building inspector to enter and search the property without a warrant, failure to comply was punishable as a misdemeanor of the first degree, and consent to the search could not be considered voluntary because of the criminal penalties which would ensue without such consent.

Would it have made a difference if the City of Bedford never enforced its inspection ordinances against any property owner?

While not discussed in the Pund case, the court in Thompson clearly provided that such facts would make no difference, by stating: “Here, even if Oakwood has never denied a certificate of occupancy or enforced the criminal provisions of its ordinance, the mere possibility of such action is enough to render any consent involuntary as a matter of law.”

Holding of Pund V. City of Bedford

Specifically, the court in Pund ruled as follows: “the City’s Point of Sale Inspection Ordinance and Rental Inspection Ordinance, as they existed on May 4, 2016, are unconstitutional both facially and as applied to Plaintiffs because they violate the Fourth Amendment to the U.S. Constitution. [The Court] further declares that fees resulting from searches under those Ordinances resulted in unjust enrichment and that Plaintiffs are entitled to compensation.”  

The case is still moving forward, however on issues involved in determining class action participation and the amount of compensation due. 

Moral of the Story

Most municipalities infuse their building and zoning codes with criminal penalties for violation of the same. In their defense, enforcing compliance with ordinances is often difficult without the threat of criminal penalties. Usually, such ordinances provide more “bark than bite” and are only enforced as a last resort.

However, as provided in Pund v City of Bedford (and Thompson V. City of Oakwood), it seems that Ohio point of sale ordinances that call for criminal penalties (whether or not actually enforced) will most likely be held unconstitutional, at least where no administrative warrant procedure is provided. In other words, if it was not clear after Thompson, it is definitely advisable now for those municipalities who have not yet done so, to clearly review their point of sale/inspection ordinances and revise them accordingly.

Former Point of Sale Ordinance in Oakwood, Ohio Held Unconstitutional

(Criminal Penalties and Lack of Warrant Procedure Held to be Key Failings of Ordinance)

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz

It is not easy being a municipality (such as a city or village) in Ohio these days. With the Ohio estate tax having been repealed several years ago and state funds cut to a trickle, it is difficult to make ends meet; especially in “bedroom communities” without a business tax base. Residents, of course still want the same level of health, safety and welfare services they have enjoyed over the years.

Seemingly, as funds continue to dwindle, so does the power to regulate. Even though Article XVIII of the Ohio Constitution gives municipalities the power of “Home Rule” (special authority to create laws and take action regarding local self-government, exercise of police powers and operation of public utilities, that have not been specifically granted to the State of Ohio), this power is slowly but surely being limited. For example, due to relatively recent legislation, municipalities in Ohio cannot regulate guns in public places, where oil and gas wells are situated, and how taxes are levied and collected.

Municipalities are also subject to more and more United States constitutional challenges. Many of these cases deal with claims that local governments are taking private property for public use without "just compensation,” violating individual rights without “due process” and curtailing free speech in 

violation of the First Amendment.

Recently, municipalities in Ohio are facing claims that they have violated the Fourth Amendment via unconstitutional “point of sale” ordinances.

Point of Sale Ordinances

While this type of ordinance can take many forms, the most common makes it unlawful to transfer ownership of any real estate, or lease to a new tenant, without having obtained a pre-sale inspection of the property under the applicable municipal code. The pre-sale inspection procedure usually requires the property owner to complete an application, schedule and appear for an inspection of the property with the code official, pay an inspection fee, and correct or otherwise address identified violations of the municipality’s fire, zoning, building, and property maintenance codes in order to obtain a certificate of occupancy authorizing the property’s sale or rental. The violation of pre-sale inspection requirements in this type of ordinance is usually punishable as a misdemeanor.

Municipalities usually defend their point of sale ordinances as valuable tools to increase the value of properties within their borders, and ensure such properties and the residents occupying the same will be and remain safe. While these ordinances often contain a “criminal component”, municipalities rarely enforce the criminal penalties, but deem them necessary to cause compliance.

Notwithstanding the laudable intentions behind this type of point of sale ordinance, and the usual reluctance of municipalities to enforce the criminal penalties associated therewith, the United States District Court for the Southern District of Ohio in Thompson V. City of Oakwood, Case No. 3:16-cv-169 (S.D. Ohio Feb 9, 2018) has recently held the (former) point of sale ordinance in Oakwood, Ohio (suburb of Dayton) has been an unconstitutional violation of the Fourth Amendment of the U.S. Constitution.

Background/Plaintiffs’ Claims in Thompson V. City of Oakwood

The pertinent facts of the case are as follows:

Plaintiffs Jason Thompson and 2408 Hillview LLC (a company formed by Thompson and a partner to buy and sell homes) own and sell residential homes in Oakwood, Ohio. The LLC engaged an agent of Re/Max to act as the sellers’/plaintiffs’ agent in the sale of their property.  The agency agreement required the property owner to apply for any required housing inspections and to furnish a copy of the certificate of occupancy. The agent paid the $60 application fee and scheduled an inspection, which inspection revealed some issues that needed to be addressed to comply with the City of Oakwood Building Code. The issues were promptly addressed and a final inspection was scheduled. During the final inspection, the building inspector asked for permission to inspect the garage, which was inaccessible during the first inspection. Permission was denied, and Ethan Kroger, the building official therefore, did not inspect the garage.

The plaintiffs then brought an action in May, 2016 under 42 U.S.C. § 1983 (a civil action for the deprivation of constitutional/civil rights) against the City of Oakwood and Mr. Kroger, for allegedly infringing the plaintiffs’ constitutional rights by requiring them to submit to warrantless searches or risk criminal punishment before permitting them to sell their homes.

Specifically, the plaintiffs sought: 1) a declaratory judgment that Oakwood’s pre-sale inspection requirement was unconstitutional on its face; 2) an injunction against enforcement of the ordinance containing that requirement; and 3) restitution of the $60 fee that the plaintiffs paid pursuant to the ordinance. Approximately one week after the filing, the plaintiffs amended their complaint, seeking to constitute their action as a “class action suit” on behalf of a class of similarly situated individuals who sold real estate in Oakwood (during the prior six years) and were “coerced into paying pre-sale inspection fees.”

Oakwood Codified Ordinance § 17-107.5

The ordinance at issue (Oakwood Codified Ordinance § 17-107.5) provided that, “it shall be unlawful for the owner of any real estate premises to transfer legal or equitable ownership of that premises, or change tenants, without having obtained a pre-sale inspection of it under this code.”  The ordinance further provided that upon completion of the inspection and other requirements, an owner could obtain a “certificate of occupancy”, which was necessary because, it was illegal, per the ordinance for a new owner or tenant to occupy any premises, “without having obtained from the code official or the previous owner a valid certificate of occupancy ...” In addition, under § 17-106.4 of the Oakwood Code, an owner who failed to comply with the pre-sale inspection or occupied a premises without having obtained a certificate of occupancy was guilty of a minor misdemeanor.

It is important to note that approximately two months after the plaintiffs’ action was filed, the City of Oakwood passed an emergency ordinance that repealed the then existing pre-sale inspection ordinance and replaced it with a new one. The new ordinance adds an administrative warrant procedure for residential and business inspections and clarifies that asserting rights under the Fourth Amendment will not trigger criminal penalties.

Defendant’s Arguments

Generally, Oakwood credited its point of sale ordinance with encouraging residents to maintain their homes, increasing home values and decreasing the number of fires and structural failures. The City of Oakwood also pointed out that: a) its property maintenance code contains an administrative appeal procedure for property owners to challenge any decision or order of a code official, and no Oakwood property owner (including plaintiffs), has filed an administrative appeal challenging the point of sale  ordinance; b) Oakwood has never denied a property owner an occupancy permit or cited a property owner for failure to comply with the pre-sale inspection requirement, and c) to its knowledge, no other owner has objected to the ordinance. The City of Oakwood did acknowledge, however that it has informed at least two property owners— (the plaintiffs) that failure to have a pre-sale inspection was a misdemeanor.

Specifically, the city argued that: 1) it was entitled to summary judgment on Plaintiffs’ § 1983 claims because its amended ordinance rendered moot, the plaintiffs’ claim; 2) it did not commit any constitutional violation because the plaintiffs consented (through their real estate agent) to the pre-sale inspection; 3) the plaintiffs relied on inadmissible evidence and failed to address the history of the pre-sale inspection ordinance; and 4) Oakwood’s code enforcement officer did not commit any constitutional violation and, even if he did, he would be entitled to qualified immunity.

The Court’s Analysis in Thompson V. City of Oakwood

Before analyzing the crux of the case, the court in Thompson agreed with the defendant’s argument that the amended ordinance rendered the plaintiffs’ injunction claims, moot. As stated by the court, “Since Oakwood’s amended ordinance provided Plaintiffs the injunctive relief they sought; as a result, that portion of Plaintiffs’ claims is indeed moot. Their claims for actual and nominal damages relating to the prior ordinance, however, are not.”

To address the defendant’s claim that no damages should be awarded (because plaintiffs consented to the search, and accordingly did not violate the Fourth Amendment), the court in Thompson first summarized the general rule of (and quoted precedent with regard to) such amendment, before evaluating whether or not the general exception to the general rule (namely, that consented-to searches do not require a warrant) applied.

--the 4^th Amendment (General Rule)-The Fourth Amendment of the U.S. Constitution provides that “[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.” U.S. Const. amend. IV. The basic purpose of the Fourth Amendment . . . is to “safeguard the privacy and security of individuals against arbitrary invasions by government officials.“ Camara v. Mun. Court, 387 U.S. 523, 527 (1967). The U.S. Supreme Court has repeatedly held that “searches conducted outside the judicial process, without prior approval by a judge or a magistrate judge [e.g., via a warrant], are per se unreasonable subject only to a few specifically established and well-delineated exceptions.”

The court in Thompson then gave two examples of unconstitutional, point of sale ordinances that authorized warrantless, unconsented-to inspections to enforce city codes. Namely, the San Francisco building code ordinance at issue in the Camara case, and the Portsmouth [Ohio] Rental Dwelling Code at issue in Baker v. City of Portsmouth, No. 1: 2015 WL 5822659 (S.D. Ohio Oct. 1, 2015). As in the Oakwood ordinance, the San Francisco and Portsmouth ordinances required applications to the applicable municipal authority for an occupancy permit (in order to sell, with regard to Camara; and to rent with regard to Portsmouth), a fee was charged, a city official approved or denied the permit based on an inspection, and failure to consent to the warrantless inspection was punishable as a criminal offense.

According to the court in Thompson, the United States Supreme Court’s decision in Camara and its progeny establish that a municipality violates the Fourth Amendment of the U.S. Constitution when it requires a property owner to consent to a warrantless inspection of their property or face a criminal penalty, unless a valid exception to the warrant requirement exists.

The court in Thompson then agreed with the reasoning of these “warrantless inspection cases” by quoting the following statement made by the court in Camara: “administrative searches are significant intrusions upon interests protected by the Fourth Amendment and when authorized and conducted without a warrant procedure, lack the traditional safeguards which the Fourth Amendment guarantees to the individual.”

---Consent Exception-If your distant memory of 11th grade history or Con Law is telling you, “wait a second, I remember there being a number of instances or exceptions where a warrant is not necessary, where a warrantless search or seizure would still be considered “reasonable” and not run afoul of the Fourth Amendment”, you would be correct. “Plain view”, “search incident to a lawful arrest”, “exigent circumstances” and “consent” are some of the more common “warrant exceptions.” 

The defendant and its counsel in Thompson were certainly aware of the consent exception, and used it to justify their argument for summary judgement in their favor (recall the plaintiffs’ real estate agent consented to the inspection of the plaintiffs’ property; the agent just asked it not include a search of the garage).

 As to defendant’s claim that plaintiffs consented to the search, the court in Thomson first recognized and agreed that consent to search is in fact a well-established exception to the Fourth Amendment’s warrant requirement… in general.

Here, however, the court reasoned that the issue was not whether or not consent was an exception, but rather, “whether or not a property owner could voluntarily consent to a pre-sale inspection where the governing ordinance makes it a criminal offense not to do so and refusing an inspection results in the denial of a certificate of occupancy.”

The plaintiffs argued that, “the denial of a certificate of occupancy and criminal penalty that could result from a failure to consent are so coercive that any consent given cannot be deemed voluntary,” and accordingly, the exception should not apply.

The City of Oakwood argued that the ordinance’s criminal penalty was not coercive because Oakwood never enforced it against any property owner and that, “if Oakwood homeowners had objected to the inspection, the inspection would not occur, and any potential defects would simply transfer to the buyer.”

The court in Thomson was not convinced, stating that, “Even if these facts are undisputed, they do not remove the coerciveness of Oakwood’s ordinance.” Quoting precedent (prior court decisions, on point), the court in Thompson provided the test of sorts to constitutionally evaluate the type of point of sale ordinances (that used to be) on the City of Oakwood’s books: “When evaluating the validity of an individual’s consent under the Fourth Amendment…not any type of consent will suffice, but instead, only consent that is unequivocally, specifically, and intelligently given, uncontaminated by any duress and coercion… [and] a person cannot provide such uncontaminated consent when refusal to do so empowers the municipal authority to deny him the right to sell his property (or make it very difficult for him to find a willing buyer and title insurance company) and prosecute him for a criminal misdemeanor.” Applying this so called test to the facts in Thompson, the court basically agreed with the plaintiffs and concluded, “Here, even if Oakwood has never denied a certificate of occupancy or enforced the criminal provisions of its ordinance, the mere possibility of such action is enough to render any consent involuntary as a matter of law.”

--Holding of Thompson V. City of Oakwood-Specifically, the court in Thompson ruled as follows: “1. Plaintiffs are granted summary judgment as to liability on their (a) § 1983 claim under the Fourth Amendment against Oakwood only, (b) § 1983 claim under the unconstitutional conditions doctrine against Oakwood only, and (c) unjust enrichment/restitution claim against Oakwood; 2. Mr. Kroger is granted summary judgment in his favor as he is entitled to qualified immunity on both of Plaintiffs’ § 1983 claims; and 3. The Court certifies the following class under Fed. R. Civ. P. 23(b)(3): All individuals and businesses that have (1) sold houses within the City of Oakwood since May 25, 2010; and (2) paid pre-sale inspection fees to the City of Oakwood in conjunction with the sale of their houses.

Moral of the Story

Most municipalities infuse their building and zoning codes with criminal penalties for violation of the same. In their defense, enforcing compliance with ordinances is often difficult without the threat of criminal penalties. Usually, such ordinances provide more “bark than bite” and are only enforced as a last resort.

As provided in Thompson V. City of Oakwood, however, it seems that point of sale ordinances that call for criminal penalties (whether or not actually enforced) will most likely be held unconstitutional, at least where no administrative warrant procedure is provided. In other words, for those municipalities who have not yet done so, it is time to revise. For those municipalities thinking jurisdictionally, think again.  The 1851 Center for Constitutional Law (the "Center") has also filed a lawsuit in the Northern District of Ohio against the City of Bedford (outside Cleveland, Ohio) with regard to a similar point of sale ordinance. Stay tuned.

Time to Proudly and Statutorily Display our Flags in Ohio

On this 4th of July holiday, in a world of economic uncertainty and cowardly acts of terrorism, it seems more than prudent to be patriotic and proud of displaying our symbols of G-d and country, particularly our flag and the banners that honor the men and women in our armed services. Believe it or not, however, the right to display is not absolute and has been subject to challenge.

Recently, in Columbus, Ohio, an 86-year-old mother of veterans was asked by her rental company to take her flag down. The company claimed the flag mount could damage the structure of the house.  You may also recall the story, several years ago of a 77-year-old U.S. Army veteran who was asked by a Summit County homeowners association to take down a flagpole he installed to display an American flag at his home. The association claimed the flagpole violated its rules that allowed flagpoles installed on homes, but not installed, in-ground. Eventually, the association backed down, but it seems incredulous that our proud veterans should have to fight for their flag, after fighting so hard for our country.  

Nonetheless, these types of challenges are happening all over the country. For example, in Connecticut, recently, an Air Force veteran is facing fines for flying the American flag in the front of his residential unit, and not in the back of the home where it is permitted.

You would think there should be laws protecting our rights to proudly display our flags. And there are; but they don’t go far enough.

At the federal level, The Freedom to Display the American Flag Act of 2005 "prohibits a condominium, cooperative or real estate management association from adopting or enforcing any policy or agreement that would restrict or prevent a member of the association from displaying the flag in accordance with the ‘United States Flag Code’ [a federal law that establishes advisory rules for display and care of the national flag of the United States] on residential property to which the member has a separate ownership interest."

Clearly, the “Flag Act” prohibits condo and similar associations from restricting flag displays. However, what about manufactured home park operators, and landlords? The federal law does not apply to them. What about state flags? I am sure there are law enforcement and other state employees who would like to pledge their allegiance to their state, as well as their country. The federal law, however, does not address the right to display state flags. Finally, the federal law does not address the right to display service banners and the POW/MIA flag.

Ohio also has what is basically a codification and elaboration of the federal law in Ohio Revised Code Section 5311.191. However, it too is silent regarding applicability to landlords, manufactured home park operators, service banners and the state flag.

Fortunately, while many states are still struggling with this issue, our great State of Ohio seems poised to fill the gaps of the Freedom to Display the American Flag Act of 2005 and ORC Section 5311.191. In fact, Ohio has two, alternate versions of a Flag-Banner Display statute: Ohio House Bill 18 and Ohio Senate Bill 84, which are summarized below:

SB84-FLAG-BANNER DISPLAY (COLEY,W) To prohibit manufactured homes park operators, condominium associations, neighborhood associations, and landlords from restricting the display of Ohio flags and blue star banners, gold star banners, and other service flags, and to prohibit manufactured homes park operators and landlords from restricting the display of the United States flag.

Current Status: 4/12/2016 - House Armed Services, Veterans Affairs and Public Safety, (First Hearing)

HB18-FLAG-BANNER DISPLAY (GONZALES, A; GINTER, T) To prohibit manufactured homes park operators, condominium associations, neighborhood associations, and landlords from restricting the display of blue star banners, gold star banners, and other service flags, and to prohibit manufactured homes park operators and landlords from restricting the display of the United States flag.

Current Status: 11/18/2015 - SUBSTITUTE BILL ACCEPTED & REPORTED OUT, Senate State and Local Government, (Third Hearing)

The only real difference between HB18 and SB84 seems to be the right to display the state flag, which is incorporated in the Ohio Senate vs the Ohio House version.

Truly, on this July 4^th, congratulations are in order to the Ohio House and Ohio Senate for recognizing the need to display our banners, our flags, and our patriotic pride. However, “timing is everything”, and in this author’s opinion it is time to bring one of these bills (preferably the senate version) out of committee, to a vote and to the governor to sign.

Tax Relief Extension Act of 2015

Putting valuable tax dollars back into the pockets of U.S. businesses for job creation and growth.

Re-printed with permission by author: Craig Miller, CPA, CGFM, MBA, Duffy+Duffy Cost Segregation Services, Inc.

 Long-Term Certainty through the Tax Extenders Bill: The U.S. House and Senate waited until just two weeks left in the calendar year [2015] to pass "The Protecting Americans from Tax Hikes Act of 2015".  The new law makes some temporary tax provisions important to commercial real estate a permanent fixture of tax law. Overall, the $622 billion dollar package of tax breaks extends 52 tax provisions for business and individuals, and also makes 22 provisions permanent, including the very business-friendly bonus depreciation, 15-year leasehold improvements, the research and development tax credit, the deduction of state and local sales taxes, and the $500,000 Sec. 179 expense limit.

These victories, coupled with what did not happen in Congress – such as a carried interest tax increase or the elimination of Section 1031 like-kind exchanges –provide the commercial real estate industry with remarkable certainty going into the new year. This tax legislation is a major victory for the commercial real estate industry.

These powerful incentive programs help businesses grow and successfully compete both in the U.S. and abroad. Business-friendly provisions such as the extension of Bonus Depreciation, the Sec. 179 expense election, and the Section 179D tax deduction for energy-efficient commercial buildings will be a massive help to companies across the nation. Extremely important among these is the permanent provision for 15-year qualified leasehold improvement depreciation. In addition, we have achieved longer-term extensions (five years) and a $3.5 billion allocation for New Markets Tax Credits. Many of our local businesses will also benefit by the act delaying the medical device tax.

Long-Term Financing: Using Depreciation as a Tax Shield – Depreciation is used by most businesses. An extremely important source of funds is cash flow added back from depreciation.  We frequently refer to depreciation as “a source of cash flow”. Proponents of bonus and accelerated depreciation argue that it is an important incentive to spur business investment and keep effective marginal tax rates on capital investment low. 

According to BEA.gov, on average, during the last 20 years, businesses raised about 40 % of their funds internally through retained earnings and depreciation. Since 1982, depreciation has provided 77 % of those internal funds.  

Bonus Depreciation: Accelerated and bonus Deprecation allows assets to be depreciated faster than their economic life. Accelerated depreciation and bonus depreciation is the largest corporate tax break, allowing companies to deduct the costs of assets faster than their value actually declines. The preference is the largest in the corporate tax code and is broadly enjoyed by most businesses.  Bonus Depreciation is extended through 2019. Businesses of all sizes will be able to depreciate 50 % of the cost of constructed personal property in commercial properties, in land improvements, and for equipment acquired and put in service during 2015, 2016 and 2017. Bonus depreciation will phase down to 40 % in 2018 and 30 % in 2019.

Section 179: The bill permanently extends small business expensing limitations and phase-out amounts, and makes permanent the rules allowing for certain qualified leasehold improvements to be eligible for expensing.  It increases the expensing limit to $500,000. Businesses exceeding a total of $2 million of purchases in qualifying equipment will have the Section 179 deduction phase-out dollar-for-dollar and completely eliminated above $2.5 million. Additionally, the Section 179 cap will be indexed to inflation in $10,000 increments in future years.

New R&D Tax Credit Eligibility: The new law will foster innovation and is expected to boost investment by incentivizing the development of cutting-edge technology with a permanent extension of both the Research and Development (R&D) Tax Credit. In addition to the permanent extension, for the first time businesses with less than $50 million in gross receipts will now be able to claim the credit against their Alternative Minimum Tax (AMT), thereby removing the single greatest barrier preventing companies from claiming the credit in the past. Secondly, the bill includes a provision that opens the credit up for start-ups, allowing businesses with gross receipts of less than $5 million a year to take the credit against their payroll taxes (capped at up to$250,000 per year) for up to five years.

Craig Miller is president of Duffy and Duffy, Cost Segregation Services, Inc. Duffy + Duffy is one of the leading Cost Segregation firms in the industry – performing studies based on case law and IRS guidance using CPA’s, and construction engineers and estimators. Cost Segregation allows commercial building owners to generate cash flow by accelerating depreciation deductions on their buildings and deferring taxes. For more information, contact Craig Miller, CPA, CGFM, MBA at 440-892-3339, or visit CostSegExperts.com

Information for this article was sourced through BEA.gov and Committee for a responsible Federal Budget