Ohio Supreme Court Upholds NEORSD's Stormwater Management Program

 

On September 15, 2015, the Ohio Supreme Court issued its long awaited decision in Northeast Ohio Regional Sewer Dist. v. Bath Twp., Slip Opinion No. 2015-Ohio-3705, and found in favor of the sewer district. The Northeast Ohio Regional Sewer District (“NEORSD”) is a sewer district created under Revised Code Chapter 6119 and services 61 communities in and around Cuyahoga County.  It sought in 2010 to implement a regional stormwater management program in the communities it services.

 

In connection with the program, NEORSD assessed fees on every parcel within its service district. The fees were based upon the amount of impervious surface located on each parcel. An impervious surface is one that does not permit the absorption of fluids; typically, artificial structures such as pavement covered by asphalt, concrete, brick and stone, as well as rooftops.

 

After NEORSD adopted its stormwater management program, it filed a declaratory action in the Cuyahoga County Court of Common Pleas to confirm its authority to establish the program and assess fees on property owners located in its service area. The trial court affirmed NEORSD’s authority to implement the stormwater management program and to assess fees on property owners.  Affected communities and several large property owners appealed, and the Ohio Court of Appeals overturned the trial court decision.  Prior to the Court of Appeals’ reversal, NEORSD had collected approximately $20 million in fees, which it placed into escrow pending its appeal to the Ohio Supreme Court.

 

The Ohio Supreme Court addressed 2 issues in its decision: (1) whether NEORSD’s stormwater management program is authorized by statute and by its charter, and (2) whether the related fee structure is authorized by statute and its charter. The court found both the plan and the fee structure to be authorized by statute and NEORSD’s charter.

 

The answer to (1) hinged on the definition of “waste water” which is defined in in R.C. 6119.011(K) as “any storm water and any water containing sewage or industrial waste or other pollutants or contaminants derived from the prior use of the water.”  The appellees and the Court of Appeals interpreted “waste water” to necessarily mean “water containing waste” and that any storm water would only constitute “waste water” when it is combined with sewage or pollutants.  The Ohio Supreme Court interpreted the statute more expansively to indicate that “waste water” comes in two forms, “any storm water” and “any water containing sewage or industrial waste or other pollutants or contaminants derived from the prior use of the water.”

 

The latter interpretation, as determined by a majority of the Ohio Supreme Court justices, is understandable from reading the text of the statute but is much more expansive in its application than the narrower reading held by the Court of Appeals, and will provide regional sewer districts with a broader reach in their authority.

 

In determining the second issue regarding fee collection, the Ohio Supreme Court held that while NEORSD currently does not own or operate the various parts of the current stormwater-management system, a “water resource project” includes facilities “that are to be acquired, constructed or operated” by NEORSD. and therefore it may assess fees for this purpose under the statute.   The court left the door open for future challenges if NEORSD fails to use the fees it collects to acquire, construct or operate a facility that will be part of the regional stormwater-management system. 

 

Some of the justices on the Ohio Supreme Court raised intriguing dissents regarding NEORSD’s fees as not being authorized by the statute or being structure as a tax masquerading as a fee.

However, neither dissent won over a majority of the court’s justices and NEORSD’s ability to assess fees under its stormwater management plan remains intact.

 

Now that the Ohio Supreme Court has affirmed NEORSD’s authority to implement the stormwater management plan and assess related fees, NEORSD has indicated it will request that funds be released from the escrow so it can begin implementing stormwater projects.  NEORSD further stated on its web site that it will take time to review the court’s decision and establish a plan for reorganizing and re-implementing its stormwater management plan before any fees are assessed against property owners in the future.

 

This decision will, in the short term, only impact the 61 communities that are part of NEORSD’s service area.  However, now that the authority to implement such programs has been upheld by Ohio’s highest court, other regional sewer districts in the State of Ohio may follow suit.

 

Commercial properties, health care facilities and multi-family projects are some the properties that will be the hardest hit by this decision as these types of projects typically have large areas of impervious surfaces. These higher costs will likely be passed along to tenants in higher rents and to customers/clients in higher prices or fees. It’s only money, right?

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Breaking: US Supreme Court overturned the EPA's air quality rule

 

The US Supreme Court overturned today the air quality rule that was issued by the Environmental Protection Agency (EPA) under the Obama Administration, holding that the EPA did not properly consider the costs of the regulation.

Click here to read The Hill's article on the decision issued today.
Click here to read the Court's opinion.
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Ohio Supreme Court: OEPA Must Follow Rulemaking Procedure For New TMDLs Before Submitting To US EPA

On March 24, 2015, the Ohio Supreme Court issued its decision in Fairfield Cty. Bd. of Commrs. v. Nally, Slip Opinion No. 2015-Ohio-991, in which the court held that --

1. A total maximum daily load established by the Ohio Environmental Protection Agency (OEPA) pursuant to the Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq. (the Clean Water Act), is a rule that is subject to the requirements of R.C. Chapter 119 of the Ohio Administrative Procedure Act; and
2. The OEPA must follow the rulemaking procedure in R.C. Chapter 119 before submitting a total maximum daily load (TMDL) to the United States Environmental Protection Agency (USEPA) for its approval and before the TMDL may be implemented in a National Pollution Discharge Elimination System (NPDES) permit.

This case involved a challenge brought by Fairfield County regarding a renewed NPDES permit issued by the OEPA back in 2006 to a wastewater treatment place that discharges into Blacklick Creek.  The renewed permit included new phosphorus limitations that were not previously included in the county's permit. The county contended that it should have had a 'full and fair' opportunity to be heard and the right to review and challenge the TMDL before it was submitted to the USEPA for approval. The Ohio Supreme Court agreed affirming the judgment of the court of appeals that had vacated the NPDES phosphorus limitations but for different reasons.

The court of appeals and the Environmental Review Appeals Commission (ERAC) before it had both determined that OEPA had a right to impose the new limits in a renewed NPDES permit without following Ohio's Administrative Procedures Act (the APA) but vacated the limits and remanded to the OEPA for further consideration due to the OEPA's failure to consider with the new permit limits on phosphorus were technologically feasible and economically feasible as required by R.C 6111.03(J)(3).

The OEPA denies that the TMDL is a rule and characterizes it as simply guidance. The court has previously held that the Ohio EPA "cannot regulate through 'guidelines' that are in reality rules requiring formal promulgation" (Jackson Cty. Environmental  Commt. v. Schregardus, 95 Ohio App.3d 527, 642 N.E.2d 1142 (10th Dist. 1994)). When reviewing guidelines or other 'documents' the court has long emphasized that it will look at such guideline or document's effect not how an agency or other governmental entity chooses to characterize it.

When determining that the establishment a new TMDL is a rule requiring the OEPA to follow Ohio's APA, the court notes that it creates new legal obligations, and the standards have general and uniform effect even though they will not be implemented against a point source (such as a wastewater treatment facility) until an NPDES permit is issued.  The court further noted that the USEPA itself is required to proceed through rulemaking when it establishes its own TMDLs and other state supreme courts (ID; SC) have addressed this issue, finding that TMDLs must be promulgated as rules before becoming the basis for discharge limitations in a permit.

Justices O'Donnell and Kennedy, while concurring in the result, did so on the grounds held by ERAC and the court of appeals. In the concurrence prepared by Justice O'Donnell, he noted that the OEPA has issued 1,761 TMDLs, including 132 TMDLs for phosphorus.  Since the OEPA did not follow the Ohio APA for any of these TMDLS, this court's decision for Fairfield County essentially invalidates all of these TMDLs and opens up all of the permits for challenges.

I sympathize with Justices O'Donnell's and Kennedy's concern over the repercussions of this decision. However, in a time when private citizens, including private business, are being subjected to an ever increasing rules and regulations from all levels of government, it's important to all of us that the government is made to follow the rules as well. Only time will tell what the fallout is from this decision.
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CMBS Litigation: The Guarantor Actually Wins One

On April 7, 2014, the US District Court in the Southern District of New York granted summary judgment in favor of the Guarantor in CP III Rincon Towers, Inc. (Plaintiff) v. Richard Cohen (Defendant) (No. 10 Civ. 4638 (DAB).   The substance of the court action revolved around a CMBS mortgage loan on property located in San Francisco, CA that had gone into default. The Plaintiff was attempting to recover the full outstanding amount owed under the loan from the Defendant alleging that the violation of certain “bad boy” provisions under the Guaranty executed by the Defendant triggered full recourse liability.

The borrower on this loan was delinquent on certain owner’s association fees, the amount of which it was disputing with the owner’s association. The borrower had also not paid certain contractor invoices due to a dispute over the work completed. These disputes, combined with nonpayment of the related invoices, resulted in liens being filed on the mortgaged property. 

The Plaintiff, in filing its action against the Defendant, alleged that the resulting liens on the property violated three full recourse provisions in the Guaranty: the “voluntary Lien, Indebtedness (without lender’s prior consent) and Transfer.”   The Defendant moved for summary judgment in its favor stating that the liens in question did not fall under either of these 3 provisions and therefore did not justify the Defendant being subject to full recourse liability.  

The Court agreed with the Defendant.  

In negotiating the Guaranty with the Plaintiff’s predecessor who negotiated the loan, the Defendant and his counsel were quite aggressive in pushing back on the form language in the agreement. Kudos to the Defendant’s counsel for doing his job well.  The takeaway for any would-be borrower or guarantor is to not blindly accept the CMBS loan documents and assume there is no room for negotiation. There is. The so-called bad boy provisions that trigger loss recourse and full recourse on the CMBS loans are broadly drafted and, from the perspective of a borrower or guarantor, need to be tightened up. Borrowers and guarantors who sign commitment letters and term sheets with these provisions already contained within the commitment document are acting foolishly, as they have pulled the rug out from under their lawyers and have undercut their ability to do their job.  

In this court action, the Plaintiff had attempted to argue that the actions or inactions of the borrower, by not paying invoices on time and/or disputing amounts, where voluntary choices and therefore the resulting liens should be categorized as “voluntary.”  The court didn’t buy into the Plaintiff’s argument, finding instead that mechanic’s liens arise by force of statute, not by an agreement of the parties. The court also held that judgment liens are imposed on the losing party and again, cannot be construed as voluntary. Strike one against the Plaintiff.  

Second, while both parties agreed that the resulting liens on the mortgaged property was properly viewed as indebtedness, the loan agreements clearly limited the full recourse trigger to indebtedness that was incurred without the lender’s prior written consent. The court interpreted this to mean it only addressed situations where a lender’s prior written consent is required before entering into the indebtedness, liability or obligation. The borrower did not need lender’s consent before starting construction or paying association fees, therefore the court held that the circumstances in this case did not fall under the full recourse provision.  

Finally, the Plaintiff argued that the liens on the property should be considered a “Transfer” which was broadly defined in the loan documents to include acts that “encumber” the mortgaged property. The court reviewed the interpretations argued by both parties and found the language to be ambiguous. It then looked outside the terms in the loan documents and revised the negotiations of borrower and lender prior to entering into the loan. Based on such external (i.e. “extrinsic evidence”), the court held that the parties clearly never intended these sorts of liens to trigger full recourse liability. 

The bottom line for parties on CMBS loans—Negotiate to protect your interests. It is important to clarify what will and will not trigger full recourse or loss recourse liability. From a borrower perspective, narrower, more specific provisions are better. A borrower also needs to review how these provisions might be unwittingly triggered by borrower’s standard operational procedures or even the simple desire to restructure ownership for estate planning purposes. Finally, work to ensure the language in the agreements clearly reflects everyone’s intentions. Otherwise, a court will interpret it for you.

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News Update: Lawyers Title Changes Its Name to Fidelity National Title

A news update from Fidelity National Title (fka Lawyers Title):

 

"On February 1, 2014, Lawyers Title changed its name to Fidelity National Title.  Although Lawyers Title had been a brand name of the Fidelity National Financial Family since 2008, by officially taking the Fidelity National name this February, we are now even more closely aligned with one of the nation’s premier real estate title underwriters that provides title insurance and other real estate-related products and services.

We are stronger than ever and we will continue to provide the exceptional experience you have known and associated with our team for over 62 years."

 

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New ‘Know Before You Owe’ Mortgage Application/Closing Forms Rolled Out

The Consumer Financial Protection Bureau (“CFPB”) issued the “TILA-RESPA Final Rule”, earlier this week which basically requires lenders to provide easier to use and understand mortgage loan forms for homebuyers (when they apply for loans, and at closing). The rule also provides additional consumer protections in the form of a three (3) day prior to closing requirement to provide closing forms to consumers, and a limit of  the circumstances requiring consumers to pay for settlement charges above the prior estimate for same.

According to the CFPB: “We’ve issued a rule to replace existing federal mortgage disclosures with new ones that are easier to understand. The new mortgage forms will help you understand your options, choose the deal that’s best for you, and avoid costly surprises at the closing table”

Lenders will have until August 1, 2015 to comply; the effective date of the rule.

The new basic forms are the “Loan Estimate Form’ and the “Closing Disclosure Form”. The Loan Estimate Form replaces the initial Truth in Lending statement and Good Faith Estimate, and brings what totaled up to seven pages to three. It provides a summary of material loan terms and a summary of estimated costs. A copy of the form can be viewed by clicking on the following link: The Loan Estimate.

The Closing Disclosure Form replaces the final Truth in Lending statement and the settlement statement (aka “the HUD-1). While it is five pages long, it replaces five pages of old forms and adds new disclosures within its five pages. A copy of the form can be viewed by clicking on the following link: The Closing Disclosure.

The CFPB claims it has improved not only quantity, but quality, with new, user-friendly language available in Spanish and English.

                                                          

A factsheet about the “Know Before You Owe” mortgage disclosures is available at: http://files.consumerfinance.gov/f/201311_cfpb_factsheet_kbyo_mortgage-disclosures.pdf

The “Know Before You Owe” mortgage disclosure rule is available at: http://files.consumerfinance.gov/f/201311_cfpb_final-rule_integrated-mortgage-disclosures.pdf

Controversial Plan to Use Eminent Domain to Seize Underwater Mortgages Advances in California

The following article was written by Laura Englehart, Law Clerk at Kohrman Jackson & Krantz and a law student at CSU's Cleveland-Marshall College of Law

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In an attempt to keep residents in their homes and prevent foreclosures, municipal leaders in Richmond, California are advancing a plan that allows the city to use its eminent domain powers to seize and refinance underwater mortgages.  While Richmond is still far from actually executing it, the controversial plan could have far-reaching effects if it continues to move forward.  Because Ohio is similarly struggling with an abundance of underwater mortgages, Ohio’s local lawmakers, lawyers, realtors, and other interested parties should take note of how the debate and implementation proceed.

The power of eminent domain allows a government to take private property for public use, but Richmond would be the first to use this power to seize underwater mortgages.  A mortgage is underwater when a homeowner owes more on the home than it is worth.  According to Zillow, 45% of homes in Richmond were underwater in the second quarter of 2013.  

In July, the City of Richmond sent letters to mortgage servicers and trustees offering to buy 624 underwater mortgages at considerable discounts and has indicated that it can otherwise use eminent domain to forcibly take the mortgages.  Upon seizing these kinds of mortgages, the city intends to compensate the banks at fair market value and would then refinance the mortgages to make them more-affordable for homeowners.

 

Housing and community advocates who support using eminent domain in this way believe it is a mechanism that can help stop the housing crisis that is devastating local communities by lowering principal balances and enabling more homeowners to stay in their homes.  Those in opposition argue that it will create a chilling effect by making banks unwilling to enter into future mortgage agreements in Richmond. The Federal Housing Finance Agency has already stated that Fannie Mae and Freddie Mac should stop doing business in places that approve the use of eminent domain to seize and refinance underwater mortgages, effectively eliminating mortgage financing.

 

Investors holding the mortgages in Richmond sued the city through their Mortgage-bond trustees Wells Fargo, Deutsche Bank, and The Bank of New York Mellon and sought an injunction to halt the plan.  Last week, however, U.S. District Court Judge Charles Breyer dismissed the case on grounds that the lawsuit was premature, as Richmond City Council has not yet voted to approve the use of eminent domain. Regardless of the ruling, whether this is a legitimate use of eminent domain remains undecided, and further lawsuits are expected as Richmond continues to move forward. 

 

Lawyers and stakeholders in Ohio should stay abreast of this ongoing controversy because Ohio is also struggling with the magnitude of the housing crisis and has a similarly high percentage of underwater mortgages. According to Zillow, in Ohio 35% homes in Lucas County (Toledo); 32% of homes in Montgomery County (Dayton), 30% of homes in Franklin County (Columbus) and Cuyahoga County (Cleveland), and 28% of homes in Hamilton County (Cincinnati) are underwater.  Other jurisdictions across the nation are already exploring whether eminent domain can or should be used as a new tool to seize and refinance underwater mortgages to stop such homes from going into foreclosure. The eventual outcome in Richmond will have widespread influence.

A Victory for Property Rights

The Supreme Court delivered a victory for property rights in June with its decision in Koontz v. St. Johns River Water Management issued on June 25, 2013.  The case addressed whether a Florida wetlands district can place excessive conditions on its approval of a land use permit.  Sadly, the circumstances at the basis of this case started back in 1994 and are only now being finally resolved. 

Mr. Koontz is a landowner in Florida who wanted to approximately 15 acres of property that was classified as wetlands. Mr. Koontz wanted to develop 3.7 acres of the land and was willing to deed the other 11 acres to the water management district  for conservation. Sounds like a pretty good deal for the district with 2/3 of the land going for conservation and only 1/3 being developed.

The district refused, wanting all but one acre of Mr. Koontz's land, or in the alternative, allowing him to proceed with the 3.7 acre development, deeding the conservation easement on the 11 acres PLUS paying thousands more to improve some other district land that had nothing to do with his proposed development.

Mr. Koontz refused and sued the district, alleging that its unreasonable exercise of state power was a taking of his property without just compensation. The Florida courts disagreed using some rather upside down logic that since Mr. Koontz was refused the permit, his land wasn't actually taken and therefore he didn't have a claim.

The US Supreme Court disagreed with the Florida court, holding that

"extortionate demands for property in the land-use context run afoul of the Takings Clause not because they take property but because they impermissibly burden the right not to have property taken without just compensation."

This decision is significant as the government at all levels can be rather creative in finding more ways to extort property from landowners.  However, I'm troubled that the decision was only 5-4. We are only one Supreme Court justice away from the government being able to further burden with impunity people's ability to use their own land.
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Are Mortgage Servicers “Suppliers” of “Consumer Transactions” pursuant to the Ohio Consumer Sales Practices Act (Part II)?

On May 14, 2013, the Ohio Supreme Court in Anderson v. Barclay’s Real Estate, Inc., Slip Opinion No. 2013-Ohio-1933 answered the above question posed to it by the Federal District Court for the Northern District of Ohio by holding that “the servicing of a borrower’s residential  mortgage loan is not a ‘consumer transaction’ as defined in O.R.C. 1345.01(a); and “an entity that services a residential mortgage loan is not a ‘supplier’ as defined in O.R.C. 1345.01(C).

A complete background and fact summary of the case can be found in this author’s earlier blog posting of March 4, 2013 appropriately titled: “Is a Mortgage Service Company a Supplier of Consumer Transactions pursuant to the Ohio Consumer Sales Practices Act (“CSPA”)?  Basically, the Anderson case originated in the Federal District Court for the Northern District of Ohio, who concluded (with regard to the CSPA claims) that there was no controlling precedent in Ohio on whether the CSPA applied to mortgage services, so the Federal Court asked the Ohio Supreme Court to answer the following two questions:

1) Does the servicing of a borrower’s residential mortgage loan constitute a “consumer transaction” as defined in the Ohio Consumer Sales Practices Act, O.R.C. 1345.01(a)?  The Plaintiff, Mrs. Anderson  argued that the answer to this first question should be “yes” because mortgage servicers provide a number of services to borrowers, including accepting their payments and working with borrowers to obtain loan modifications.  The servicer, Barclay’s Real Estate, Inc. dba HomEq Servicing (“HomEq”) argued that mortgage servicers perform their services for financial institutions, not for borrowers/consumers, and that therefore the transactions were commercial and not covered by the CSPA.

The Supreme Court of Ohio agreed with HomEq, holding that the servicing of a borrower’s residential mortgage loan is not a “consumer transaction.”  To justify its holding, the court first recognized that one essential element of O.R.C. Section 1345.01(a) was not met:  that there was no “sale, lease, assignment, award by chance, or other transfer of a service [by the servicer]to a consumer”.  Rather, the court reasoned that mortgage servicing is a contractual agreement between the mortgage servicer and financial institution, with no direct contract between the borrower and the mortgage servicer.  While the court acknowledged that the servicer’s duties might involve interaction with borrowers, it reasoned that those interactions are always on behalf of the financial institution. 

The court further reasoned that service provider transactions are not consumer transactions because there is no “transfer of an item of goods, a service, a franchise or an intangible” as required by the statute. The court explained that while a financial institution may contract with a mortgage servicer to service a loan, the mortgage servicer does not transfer a service to the borrower.  The court’s decision was also influenced by:  (1) the CSPA 2007 amendment which added dealings between consumers and loan officers, non-bank mortgage lenders and mortgage brokers as being covered by the CSPA but did not include dealings between consumers and mortgage servicers; (2) Uniform Consumer Sales Practices Act commentary which noted that land transactions should be specifically excluded from Consumer Sales Practices Acts; (3) Ohio court decisions holding that the CSPA does not apply to “collateral services” that are solely associated with the sale of real estate; and (4) other states that wanted real estate transactions and loan servicing covered by their consumer protection statutes specifically defined consumer transactions to include them.

2) Is a mortgage servicer a “supplier”?  Mrs. Anderson argued that servicers are “suppliers” within the CSPA because they essentially function as collection agencies.  The court disagreed, concluding that in order to be a supplier, the servicer would have to be engaged in the business of “effecting” or “soliciting” consumer transactions as provided in O.R.C. 1345.01(c). The terms “effecting” and “soliciting” are not defined in the CSPA, so the court went to Black’s Law Dictionary and found “effect” to mean “to bring about or to make happen”; and  “solicit” to  mean “requesting or seeking to obtain something”. Since servicing a mortgage does not cause a consumer transaction to happen, and mortgage servicers do not seek or request borrowers, the court handily dismissed the plaintiff’s argument and held that servicers are not “suppliers” under the CSPA.

 In spite of the Supreme Court of Ohio’s ruling, many believe that since lenders often disappear once they sell their loans, and the homeowners are left to deal with a servicer exclusively, mortgage servicers are exactly the type of entity intended to be regulated by the CSPA.  Since the court has spoken, however, the only recourse for those who disagree with its decision is to lobby the Ohio Legislature to specifically amend the CSPA to include dealings between consumers and mortgage servicers. 

 

Sun Continues to Shine on the Housing Industry

Spring is in the air and the sun continues to shine on the housing industry in Ohio, and nationwide.

In fact, sales of previously owned homes, nationwide grew to their highest level in more than three (3) years. Last week, the National Association of Realtors (“NAR”) reported a .8% increase in home sales from January to February, 2013, and a 10.2% increase from February, 2012 to February, 2013. That is the 20th consecutive month of year-over year gains as reported by Alan Zibel and Sarah Portlock in their March 22, 2013 Wall Street Journal Article: “Existing Home Sales at 3-Year High.” Lawrence Yun, chief economist for the NAR adds that “the only headwinds [faced by the housing industry] are limited housing inventory, which varies around the country and credit conditions that remain too restrictive”.

In Ohio, sales of new and existing homes from February, 2012 to February, 2013 increased by the same robust 10.2%. For those who like to look beyond the silver lining and focus on the clouds, however, sales in Northeast Ohio have reportedly slipped within this same February, 2012 to February, 2013 period. According to the Northern Ohio Regional Multiple Listing Service (MLS), and the March 22, 2013 Cleveland Plain Dealer article: “Area Home Sales Slip in February” (by PD Reporter, Michelle Jarboe McFee), the 15 County Northeast Ohio Area saw an overall decrease of 1.6% during such period. Some of the Northeast Ohio County results were reported as follows:

Geauga County: -15.0%;

Summit County: -22.5%;

Lorain County: -2.5%;

Portage County: +24.6%;

Cuyahoga County: +4.8%

Northeast Ohio’s reported price decrease, however was called into question by Howard Hanna, the president of Howard Hanna, Ohio. According to Mr. Hanna, his company showed a 24-28% increase in sales from last year.

Elsewhere in Ohio, Franklin County showed a 6.3% increase in home sales from February, 2012 to February, 2013, and according to the Cincinnati Board of Realtors, the overall Cincinnati area (including Butler and Warren Counties) posted an average 15% increase for such period.

Personally, I think it is time we focus on the more than half-full part of the glass. Throw in great “Dow gains”, low interest rates, more credit availability, and rising, but still affordable sales prices and we have the ingredients for a complete housing recovery, and something to smile about.

Is a Mortgage Service Company a “Supplier” of “Consumer Transactions” pursuant to the Ohio Consumer Sales Practices Act?

The Federal District Court for the Northern District of Ohio in Sondra Anderson v. Barclays Capital Real Estate Inc. dba Home EqServicing, 2011-0908 certifies the question to the Ohio Supreme Court who heard oral arguments on February 26, 2013.

The facts of the case are simple enough (the law, not so much). In 2005, Sondra Anderson of Norwalk, Ohio took out a mortgage to buy a house. As is often the case with mortgages, the lender then sold the mortgage note to an investment pool that contracted with Home EqServicing (“Home Eq”) to “service” the loan (i.e. collect the payments, enforce the mortgage, handle questions, disputes…). After some time, Anderson missed and/or made late payments which triggered late charges and interest. She eventually caught up, and then continued to make her regularly scheduled payments. According to Anderson, Home Eq applied Anderson’s regular payments first to the late charges and interest, and then to the regular payments of principal and interest due under the note. Anderson claimed that such collection procedure was contrary to her mortgage that stated funds from her payments would be applied to late charges and penalties, only after currently due interest, principal and escrow items (taxes and insurance) had been covered.

After failing to get a proper accounting of the payments made, Anderson sued HomeEq for conversion, unjust enrichment, and violations of the Federal Real Estate Settlement Procedures Act (“RESPA”) and the Ohio Consumer Sales Practices Act. (“Consumer Act”.) Home Eq then filed a motion to dismiss all claims and the Federal District Court for the Northern District of Ohio denied the motion with regard to everything but the Consumer Act. With regard to the Consumer Act, the District Court concluded that there was no controlling precedent on whether the Consumer Act applied to mortgage servicers, so it basically asked the Ohio Supreme Court to answer that question for it.

We won’t know the answer until the Supreme Court of Ohio issues its opinion, though some analysts are giving the edge to HomeEq because when the Consumer Act was amended in 2007 to add dealings between consumers and loan officers, non-bank mortgage lenders and mortgage brokers as “Consumer Transactions” governed by such Act, dealings with mortgage services did not make the list.

Section 1345.01 of the Ohio Revised Code is the pertinent statute (within the Consumer Act) defining “Consumer Transaction” (1345.01 (A)) and “Supplier” (1345.01 (C)). Consumer Transactions are defined to include “a sale, lease, assignment…or other transfer of an item of goods, a service or an intangible…to an individual for purposes that are primarily personal, family, or household…” but also, per the 2007 amendment to include “transactions in connection with residential mortgages between loan officers, mortgage brokers, or non-bank mortgage lenders and their customers”. Section 1345.01 (C) defines “Supplier” as a “seller, lessor, assignor, franchisor, or other person engaged in the business of effecting or soliciting consumer transactions, whether or not the person deals directly with the consumer”.

HomeEq’s principal argument is that the plain language of the statute does not include mortgage servicers. They acknowledge that mortgage servicing is a service, but to lenders, not to consumers (homeowners). They claim to “service” the lender by collecting payments… for the lender according to the express terms of a mortgage, a document agreed to by the lender and the homeowner, not the servicer.

Anderson, supported by the Ohio Attorney General’s office (who filed an amicus curiae [friend of the court] brief) argued that there is no exclusion of mortgage servicers under the Consumer Act and that the wording is general enough to include them. Further, they emphasize that since lenders often disappear once they sell their loans, and the homeowner is left to deal with the servicer exclusively, mortgage servicers are exactly the type of entity intended to be regulated, and in effect, are “effecting consumer transactions” every month when payments are made.

Perhaps the ultimate decision will turn on Chief Justice O’Connor’s question during oral arguments as to whether the mortgage servicer just “facilitates” a mortgage transaction after it is completed between lender and borrower, or whether it “effects” a series of payment transactions between the borrower and servicer until the loan is paid off. Stay tuned.

Happy Holidays from the State of Ohio's Department of Commerce

Effective January 1, 2013, transferors of residential property will need to complete the Department’s revised Residential Property Disclosure Form. The 2013 Form replaces the one last revised in 2008.

Pursuant to Ohio Revised Code 5302.30 and Ohio Administrative Code Section 1301:5-6-10, Ohio’s Residential Property Disclosure Form ( the "Disclosure Form") is required to be filled out and signed by sellers of "Residential Property" (defined in the Code as real property improved by a building or other structure with 1-4 dwelling units).

The Disclosure Form is neither a substitute for due diligence (aka thorough inspection of property), nor a guarantee against seller omissions/misrepresentations. In fact, the form itself provides (now in CAPS) that “THIS FORM IS NOT A WARRANTY OF ANY KIND BY THE OWNER OR BY ANY AGENT OR SUBAGENT REPRESENTING THE OWNER. THIS FORM IS NOT A SUBSTITUTE FOR ANY INSPECTIONS. POTENTIAL PURCHASERS ARE ENCOURAGED TO OBTAIN THEIR OWN PROFESSIONAL INSOECTIONS.” Perhaps the most powerful remedy of this statute is the recession right granted to the transferee if the Disclosure Form is not provided prior to the time a purchase agreement is entered into.

The following changes are evident when comparing the 2013 Disclosure Form to the 2008 Disclosure Form:

1) The “Purpose of Discosure Form”, “Owner’s Statement” and “Instructions to Owner” sections are now more conveniently located on a new cover page;

2) If the property is vacant, the Disclosure Form now requires the transferor to divulge the period of vacancy;

3) In each category of disclosure (e.g., Sewer System, Roof, Mechanical Systems…), the Disclosure Form now clarifies that the transferor must divulge known current and previous material problems. The previous Form seemed to only require the transferor to divulge previous problem information if repairs were made;

4) The Disclosure Form now requires the transferor to divulge if there are any oil, gas or other mineral rights leases on the property (and cautions the purchaser re: the need for diligence re: same);

5) The Disclosure Form now requires the transferor to list known assessments against the property in terms of amount and duration;

6) The Disclosure Form now cautions the purchaser to exercise diligence with respect to abandoned underground mines; and

7) The Disclosure Form has changed “Owner’s “representation” to a “Certification of Owner”. The change does not appear to be substantive, but time will tell after court interpretation of same.

To see a copy of the newly revised [Effective 1/1/2013] Residential Property Disclosure Form, Click 
http://www.ohiorealtors.org/wp-content/uploads/LEGAL/RPDF2013.pdf
2013  and HAPPY HOLIDAYS!!!

You Got to Know When to File ‘Em (Ohio Foreclosure Actions)

In order to invoke a court’s jurisdiction (i.e. authority to hear a case), a plaintiff must demonstrate a personal stake in the outcome of a lawsuit.  This principle is also referred to as “standing”. In cases to enforce an obligation to pay mortgage debt, such as a foreclosure action, the party who owns the note (i.e. the original lender, or an assignee of the original lender) at the initiation of the action would be the party with standing to sue. With mortgages being assigned “left and right” these days, it is not always easy finding the original note, and savvy defense lawyers have been successful in getting some of these foreclosure actions dismissed.

Knowing when to file foreclosure actions is just as important as identifying who should file. Suppose “Original Lender A” assigns a note/mortgage to “New Lender B” who assigns to “New Lender C” (and New Lender C holds the note and mortgage at the time of judgment), but New Lender C filed the foreclosure action prior to the assignment from New Lender B. Before the recent Supreme Court of Ohio case Fed. Home Loan Mtge. Corp. v. Schwartzwald, Slip Opinion No. 2012-Ohio-5017, the answer depended on which appellate district in Ohio the action was filed in.

The facts of the Schwartzwald case are simple enough. In November 2006, Mr. and Mrs. Schwartzwald purchased a home in Xenia, Ohio and received a mortgage loan from Legacy Mortgage. Legacy then assigned the note and mortgage to Wells Fargo Bank, N.A. (as servicing agent for Federal Home Loan Mortgage Corporation (“Freddie Mac”)). In November 2008, Mr. Schwartzwald lost his job and defaulted on the mortgage loan in January of 2009. While Wells Fargo preliminarily indicated its consent to a “short sale” of the property, Freddie Mac commenced a foreclosure action on April 15, 2009.

On May 15, 2009, Wells Fargo formally assigned the note and mortgage to Freddie Mac, and filed a copy of the same with the trial court who, upon motion for summary judgment, ordered the property foreclosed, and to be sold at sheriff sale. Freddie Mac then bought the property at the sheriff’s sale.

Upon appeal, the Second District Court of Appeals affirmed, concluding that although Freddie Mac lacked standing at the time it commenced the foreclosure action, it cured that defect by the assignment of the mortgage and transfer of the note prior to entry of the judgment of foreclosure. The court of appeals acknowledged and certified that its decision conflicted with the First District Court of Appeals (Wells Fargo Bank, N.A. v. Byrd, 2008-Ohio-4603) and the Eighth District Court of Appeals (Wells Fargo Bank, N.A. v. Jordan, 2009-Ohio-1092). Thus, the “table was set” for Fed. Home Loan Mtge. Corp. v. Schwartzwald to be decided by the Ohio Supreme Court.

The Ohio Supreme Court simply rejected the Second District’s finding that Freddie Mac’s initial lack of standing to sue had been remedied by the assignment of the Schwartzwald’s mortgage and promissory note from Wells Fargo to Fannie Mae after the foreclosure had been filed, and held: “Here, it is undisputed that Freddie Mac did not have standing at the time it commenced this foreclosure action, and therefore it failed to invoke the jurisdiction of the court of common pleas. Accordingly, the judgment of the court of common pleas is reversed and the case is dismissed.”

Good news for the Schwartzwalds? Yes and no. Yes, because the case is dismissed and they get the property back. No, because nothing prevents Freddie Mac, who now is a real party in interest with standing, from filing a new foreclosure action.

Submitting Docs to Lorain County? Change in Policy Coming

 

For anyone submitting documents to Lorain County, please be advised that effective November 1, 2012, the Lorain County Auditor's office will no longer accept any documents by mail.  The Auditor's office will only accept documents when delivered in person.

 

Any documents that do not need the Auditor's approval can still be mailed to the Lorain County Recorder's office for recording.

 

 

 

 



In “Snail Mail v. Internet”, Snail Mail Prevails; at Least Where Due Process is Concerned.

In a world of Smartphones, E-readers, and the WorldWideWeb, reading the morning newspaper, curling up beside the fire with a good book and writing personal letters may soon be a thing of the past. However, those (like this author) who still prefer “real” to “virtual” reality can celebrate a victory for the old fashioned. Virtual website information will not do when due process is concerned, according to the Ohio Supreme Court in: PHH Mtg. Corp. v. Prater, Slip Opinion No. 2012-Ohio-3931.

In Prater, the Claremont County, Ohio Sheriff’s Office discontinued their practice of sending Sheriff Sale notices to lawyers by snail mail in an effort to control costs. Instead, they offered a website address whereby lawyers could seek information on line. It turns out that the lender in the case, “PHH Mortgage Corporation”, missed the foreclosure sale of the property it had a mortgage on (it was planning on bidding to take back the property) and the property was sold at Sheriff’s Sale to one of the Defendants, Scott Wolf.

The plaintiff-lender argued that the property was taken without due process because it did not receive a notice by mail of the sale. The lender further argued that its case was comparable to one that the Ohio Supreme Court already ruled on, namely Cent. Trust Co., N.A. v. Jensen, 67 Ohio St.3rd 140,141, 616 N.E.2d 873 (1993). The court in Jensen held that notice by publication (in a newspaper, for example) to a person with a property interest in a proceeding is insufficient notice when that person’s address is not known or easily ascertainable. On these facts, the party to a foreclosure action would be entitled to actual notice by mail.

The defendant argued that the website method of notice employed by the Sheriff’s Office was different than notice by a newspaper or publication. Mr. Wolf contended that unlike the traditional newspaper publication, the bank did receive a notice letter which directed the lender where to obtain all necessary Sheriff Sale information.

The Court in Prater disagreed with the defendant (and the trial court and appellate court that held for the defendant). The Court in Prater reasoned that there is an important due process issue here. The court stated that “requiring parties to first read a notice that directs them to a website to then search for information that could just as easily have been a part of the original notice poses an additional, unnecessary burden on the party, particularly for parties that do not have readily available high-speed Internet access or the skills to navigate websites.” The court then offered statistics that disclosed 40% of rural homes and 30% of urban homes do not connect to the Internet. The court acknowledged that while the Prater case involved a bank attorney, it had to consider precedent, and the effect of such notice to all parties, whether sophisticated or not.

So fellow paper lovers, hold on to your parchment and rejoice in this victory of “real vs virtual reality”. I plan to celebrate by sending my tech savvy, Generation X son a copy of the Prater decision as proof of our constitutional need for parchment, at least when certain inalienable rights are concerned. As succinctly stated by the Court in Prater, “notice that misses 30% to 40% of its intended audience does not constitute the notice our constitution demands when property is in jeopardy”.

It is important to note, however, that the Ohio Supreme Court did not hold that snail mail is the only form of notice that would satisfy due process. Rather, a foreclosure sale notice requiring a party to look at a website to find notice of the sale on similar facts as the Prater case would be insufficient. A foreclosure sale notice, according to the Court in Prater, must, at a bare minimum be as likely to provide actual notice as snail mail does.

Translation: Time (and future cases) will tell if notices affecting other constitutional rights will be able to keep the U.S. Postal Service in business, and paper lovers, happy.

Ohio Supreme Court Rules that Next Door Neighbor in Next Door Town has Standing to Challenge the Constitutionality of the Neighboring Town’s Re-Zoning

Moore v. Middletown, Slip Opinion No. 2012-Ohio -3897

For those paying close attention to the articles in this Blog, you may recall my March 12, 2012 post entitled “Ohio Supreme Court Rules Next Door Neighbor in Next Door Town Lacks Standing to Pursue Regulatory Taking Claim.” Did the Ohio Supreme Court reverse itself in Moore v. Middletown? The short answer is no; instead, it took the opening it left itself in Clifton v. Blanchester, 131 Ohio St. 3d, 287, 2012-Ohio-780. The long answer is as follows:

In Clifton, 23 acres of land were annexed by the Village of Blanchester and then rezoned for industrial use, leaving the adjoining 97 acre farm owner in the adjacent city unhappy and claiming an adverse economic effect on his land. The court in Clifton concluded that “aside from acquiring property to operate a public utility that serves its own residents, a municipality has no authority to exercise its eminent domain powers beyond its corporate limits”. Therefore, the Village of Blanchester had no authority to “take” Mr. Clifton’s land, and accordingly, the next door neighbor (Mr. Clifton) from the next door town (Clinton County) did not have standing to initiate a claim for compensation based on a regulatory taking.

The court in Clifton, however, left its door open for future claims of standing by stating “we emphasize that we do not hold that an adjoining property owner may never have standing. Instead, we hold that a property owner lacks standing under the facts and circumstances presented here”.

Moore v. Middletown presents similar facts to the Clifton case. The Moore case arose from two ordinances enacted by the Middletown City Council. The first of those ordinances rezoned a 157 acre parcel of land from low density residential to general industrial use. The second ordinance amended a setback provision that previously required all industrial activities to be at least 600 feet from a property line. The Moores, like the Cliftons, owned adjacent property that was in an adjoining town. The Moores claimed that the rezoning was not for the benefit of the public but for the private benefit of the city’s largest employer, AK Steel Corporation (to allow for an industrial plant that would convert coal into coke for its steelmaking).

Moore brought suit against the city based on two different kinds of relief. Moore first asked that Middletown be ordered to appropriate Moore’s land and compensate the Moores for loss of value that they expected as a result of the rezoning. The second type of relief requested was a judgment calling for the rezoning ordinances to be held unconstitutional under the due process and equal protection clauses of the Ohio and U.S. Constitution. It is this two pronged approach in Moore that separates the two cases. Mr. Clifton did not challenge the constitutionality of the City of Blanchester’s rezoing.

The Court in Moore, consistent with its decision in Clifton, struck down the appropriation claim on the same basis that it struck down the Clifton claim. The court in Moore, however (overruling the 12th District Court of Appeals) held that the plaintiff does have standing to assert constitutional due process and equal protection claims. Citing U.S. Supreme Court decisions, the court in Moore summarized that to succeed in establishing standing for constitutional claims, plaintiffs must need only show that they 1) suffered an injury, 2) that the injury is fairly traceable to the defendant’s allegedly unlawful conduct, and 3) that the injury is likely to be redressed by the requested relief sought.

Justifying its decision, the court in Moore reminds us that Ohio expressly incorporated individual property rights into the Ohio Constitution in terms that re-enforced the important nature of an individual’s “inalienable” property rights, which ought to be held forever, “inviolate” (Ohio Constitution §19, Article 1). Since zoning ordinances can directly affect and often limit property rights, the court in Moore reasoned that property owners in Ohio (even neighboring landowners of the municipality that enacted the zoning) have the right to bring cases testing the constitutionality of zoning ordinances, including claims that the government action is arbitrary and unreasonable and bears no substantial relation to public health or safety.

The court in Moore also cautions us that the overall resolution of the case is far from over. In that regard, the Court stated: “the question before us in this appeal is whether they have a standing to do so, not whether they will succeed in their efforts”. Accordingly, the case was remanded to the trial court to determine the constitutionality of the municipality’s rezoning.

For those wondering why their attorneys draft fifty (50) page “briefs” and complaints to include multiple causes of action and alternative theories of recovery, Moore v. Middletown provides the answer. “Throwing everything at them and hoping something sticks” can be an effective strategy, especially when dealing with constitutional issues. It seems that Mr. Moore and his attorney have an uphill battle to have the rezoning declared unconstitutional, but at least their day in court continues. Stay tuned.

Recent Ohio Construction Law… Changes

Any assistance to help increase public construction activity (or make it easier) would certainly be welcome these days, so thank you to the Ohio Legislature, for the following new amendments (except, perhaps for "Amendment No. 4" below):

1) Ohio HB 509- Effective September 28, 2012

The competitive bidding thresholds for cities, villages, specified boards, and sanitary districts are increased to $50,000;

2) Ohio HB 487 (repealing Ohio RC Sections 2909.32-.33)-Effective September 10, 2012

“Declarations of Material Assistance” are no longer required to be submitted by persons bidding on public projects;

3) Ohio Am. Sub. HB 135- Effective September 28, 2012

Prevailing wage thresholds for new “vertical construction projects”(vs. bridge, road work) were increased from $125,000.00 to $200,000.00 beginning 9/28/2012, and will increase to $250,000.00 beginning 9/28/2013. Vertical reconstruction thresholds were also increased;

 

4) Ohio Sub. SB 224- Effective September 28, 2012

While not limited to public construction contracts, Ohio Sub. SB 224 generally shortens the “statute of limitations” (or the law establishing the period within which one is able to bring legal action) upon a written agreement or contract from 15 years to 8 years after the cause of action accrued. Current exceptions to Ohio’s statute of limitations for written contracts (ORC 2305.06) dealing with unclaimed funds, and contracts for the sale of goods (pursuant to UCC 2-725) remain in effect. Obviously, political subdivisions won’t be too happy about this one, but public construction project bidders should be pleased.

Hiring Real Estate Lawyers - Legal Expert Awards

For those of you not familiar with the web site, eLocal.com, it provides a network of legal professionals that provides tips and advice on various topics. eLocal.com just launched a real estate expert page on its web site and asked me to participate in posting expert answers on real estate issues.

The question last week was "When are real estate lawyers necessary?"  Our answer won the award for "Most Insightful".

Check out eLocal.com's site and the other award winning answers.

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Ohio Modifies Real Estate (Tax) Valuation Statute- R.C. 5713.03

Ohio Am. Sub H.B. 487 (H.B. 487) which includes changes to R.C. 5713.03 (the section of the Ohio Revised Code regarding valuation of real property in Ohio) was signed into law on June 11, 2012. While small in terms of number of words changed, the amendment to R.C. 5731 is expected to be huge in terms of impact on proving property values before local boards of revision.


One of the biggest changes in the law is that Ohio county auditors are no longer obligated to consider the recent sale price of real property to be its true value. You may recall that the plain “mandatory” language of the original statute regarding recent sales prices establishing value was reinforced by the Ohio Supreme Court in Berea City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision (2005), 106 Ohio St.3d. 269. Basically, the Court in Berea reversed prior decisions that factored in circumstances impacting the sale price (to establish value) such as mortgages, sale-lease-backs… The revised statutory language of R.C. 5713.03 now provides that an auditor "may" (vs. shall) consider the price of a recent sale as value. Perhaps compelling appraiser testimony can now trump the recent sales price as a property’s true value.

The other major change to the statute regards what type of real property interest is to be valued by Ohio county auditors. Prior to Am. Sub H.B. 487, R.C. 5713.03 provided that each county auditor "was to determine ….the true value" of each real estate parcel. Revised R.C. 5713.03 now provides that the true value of "the fee simple estate, as if unencumbered" is to be valued by Ohio county auditors. In other words, leases, mortgages and other encumberances are not to be taken into consideration when establishing market value for real property taxation.

In order to better visualize the changes, an excerpt from revised R.C. 5713.03 is re-produced below:

“Sec. 5713.03. The county auditor, from the best sources of information available, shall determine, as nearly as practicable, the true value of the fee simple estate, as if unencumbered, of each separate tract, lot, or parcel of real property and of buildings, structures, and improvements located thereon and the current agricultural use value of land valued for tax purposes in accordance with section 5713.31 of the Revised Code, in every district, according to the rules prescribed by this chapter and section 5715.01 of the Revised Code, and in accordance with the uniform rules and methods of valuing and assessing real property as adopted, prescribed, and promulgated by the tax commissioner. He The auditor shall determine the taxable value of all real property by reducing its true or current agricultural use value by the percentage ordered by the commissioner. In determining the true value of any tract, lot, or parcel of real estate under this section, if such tract, lot, or parcel has been the subject of an arm's length sale between a willing seller and a willing buyer within a reasonable length of time, either before or after the tax lien date, the auditor shall may consider the sale price of such tract, lot, or parcel to be the true value for taxation purposes. However, the sale price in an arm's length transaction between a willing seller and a willing buyer shall not be considered the true value of the property sold if subsequent to the sale:


(A) The tract, lot, or parcel of real estate loses value due to some casualty;


(B) An improvement is added to the property…”


Some believe the newly revised statute will result in lower values for commercial properties that have above market rents but are otherwise comparable to surrounding properties. The flip-side, however, is that those with below-market rents in affluent neighborhoods may see their values increased. Most others, including this author believe that there are more questions than answers at this point.

For a complete copy of Am. Sub H.B. 487, go to: http://www.legislature.state.oh.us/BillText129/129_HB_487_EN_N.html______________________.

"Caveat Home Buildor"

The doctrine of caveat emptor (“Let the Buyer Beware”) is still alive and well in Ohio, generally precluding recovery in an action by a purchaser against a Seller pertaining to a property’s defective condition if :

1) the condition complained of is open to observation or discoverable upon reasonable inspection;

2) the purchaser had the unimpeded opportunity to examine the premises; and

3) there is no fraud on the part of the vendor. Layman v. Binns (1988), 35 Ohio St.3d 176.

Even more claims are precluded if the real estate is sold "as is."When a buyer contractually agrees to accept property "as is," the seller is relieved of any duty to disclose the property's latent conditions and only has the duty not to commit an affirmative fraud. Kaye v. Buehrle (1983), 8 Ohio App.3d 381, 383.

While Ohio’s Seller Disclosure Act (R.C. 5302.30; the “Disclosure Act”) still requires sellers of most types of residential property to disclose known defects, the Disclosure Act does not directly modify the doctrine of caveat emptor by creating a new statutory fraud claim or by eliminating existing common law claims. In fact, Section 5302.30 (l) of the Disclosure Act makes it clear that R.C. 5302.30 is not intended to affect any (common law) remedies available prior to its enactment.

The Supreme Court of Ohio, however, in Jones v. Centex Homes, Slip Opinion No. 2012-Ohio-1001 has recently reminded us that a buyer of a “defective home” may have one other possible cause of action in its arsenal (against the home builder vs. the seller) -breach of the duty to construct a house in a workmanlike manner using ordinary care.

The facts of the case are quite simple. Paul Jones and Latosha Sanders purchased a new home from the builders, Centex Homes in 2004. After moving into their new home, they discovered that none of their electronic devices (computers, televisions, cordless phones) were working properly. For example, their hard drives were erasing, and television reception was practically non-existant. The buyers’ consultant alleged that the metal joists (structural members) of the home were magnetized, causing the problems. The buyers sued Centex after an amicable resolution could not be reached.

Centex’s basic argument was that the sales agreement was an “as is” contract that disclaimed all express and implied warranties, except a limited warranty that did not cover the problems expressed by the buyers. Both the trial court and the court of appeals agreed with Centex.

The Supreme Court of Ohio did in fact agree that there was a disclaimer of warranties in the contract, and that the limited warranty did not cover the defective condition. The Court even acknowledged that the obligation to construct in a workmanlike manner may arise from a contract. However, the Court concluded that the cause of action for failing to construct in a workmanlike manner is not based on contract, but on a duty imposed by law (“We conclude that in Ohio, a duty to construct houses in a workmanlike manner using ordinary care is imposed by law on all home builders”). While the Court did not provide a definition of “workmanlike manner”, the Court cited past court cases dating back to 1966 which included builders constructing homes in the low portions of their lots and failing to install foundation drainage systems. The Court also clarified that these decisions are not dealing with builders being held strictly liable for structural defects, on an implied warranty basis, but with home builders violating the duty to construct in a workmanlike manner, which essentially holds a builder liable only for negligence. The only other “guidance” provided by the Court was that “the duty does not require builders to be perfect”.

The “Jones Court” also reviewed the issue as to whether or not the duty to construct in a workmanlike manner could be waived. Without citing direct authority from prior cases, the Court firmly held that such a duty is “the baseline standard that Ohio home builders can expect builders to meet” and that accordingly, “a home buyer’s right to enforce that duty cannot be waived".

The bad news for home builders is that there is no “quick fix” to their form contracts as a result of this decision. The Court was quite clear that the buyer’s cause of action arises from a duty imposed law, not by contract and that while warranties (express and implied) can be waived by contract language, the duty to construct houses in a workmanlike manner cannot. Further bad news for home builders is that the Court reaffirmed its decision in McMillan v. Harpenau-Torbeck Builders, 8 Ohio St. 3d, 3 (1983) that established that the cause of action based on the duty to construct houses in a workmanlike manner extends to subsequent buyers. On the other hand, commercial builders can rest easy: the Jones decision does not apply to them…yet.

The good news for home buyers is that “caveat emptor” is no longer the only “game in town”.             “Caveat home build-or” just moved in.