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 “2nd 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 2nd 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 ObduskeyThe 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.

Don’t Get Knocked Out of the Gate before the Race Starts: Ohio Supreme Court Holds that Filing of Tax Complaint by Property Manager is Unauthorized Practice of Law

By: Stephen D. Richman, Esq.-Senior Counsel, Kohrman, Jackson & Krantz
Answering the “what, when, where and why questions” relating to real estate tax complaints in Ohio is a lot easier than answering “who” can file real estate tax complaints. The Ohio Supreme Court in Greenway Ohio, Inc. v. Cuyahoga Cty. Bd. of Revision, Slip Op. No. 2018-Ohio-4244, however, recently provided a little guidance as to answering the “who question.”

I.                   The What/When/Where/Why of Real Estate Tax Complaints in Ohio
What: Property owners, concerned that their real property tax values are too high may file a complaint to reduce the same. Those tax values, multiplied by local tax rates result in the amount that property owners will pay in real estate taxes. 
When: Complaints may only be filed between January 1 and March 31 (April 1, 2019 for tax year 2018) to contest the prior year’s tax value. For example, if a complaint is filed in 2019, it relates back to the tax value of the property as of January 1, 2018. Pursuant to Ohio statutory law, as well as Ohio Department of Taxation rules, real property in all Ohio counties is required to be reappraised every six years, and updated every three years. Normally, owners can challenge a county auditor's valuation just one time in each three-year cycle (a “triennial”) unless the property was sold in an arm's length transaction, the property lost value due to a casualty, substantial improvement was added to the property or there was an increase or decrease of at least fifteen per cent in a commercial property's occupancy.

Time is definitely “of the essence” with regard to tax complaints. If a complaint is filed even one day late, it will be dismissed.
Where/How: Property values are challenged via a "Complaint Against Valuation" that is filed with the local Board of Revision (“BOR”). The same complaint form is used statewide. It can be downloaded from county auditor websites as well as from the Ohio Department of Taxation's website. It is important to fill out the form carefully, because incorrect information can result in the dismissal of a case.  
Why: Basically, complaints are filed to petition for lower property values, because lower property values means lower property taxes. Common reasons to challenge property values include declining market values, declining rents/increased vacancies for income-producing property, obsolescence and casualty damage. In addition, people who recently purchased a property in an arms-length transaction for less than their county auditor's value, often have a strong basis for filing a tax appeal (due to case law which provides that the sale price in an arm’s length transaction between a willing seller and a willing buyer is usually considered good evidence of value).
What if there is no recent sale involved? Does it still make sense to challenge your property’s increased valuation?
The answer is, of course, it depends. It depends on the amount of additional taxes that will need to be paid, for how long, and the attorney, appraiser and other fees involved with a complaint.   For example, let’s say the county increased the value of your property by $20,000. While that number is significant, if your county’s tax rate as a percent of market value is 2%, your taxes would only increase by $400/yr.  On the other hand, a $100,000 valuation increase on a commercial property with the same tax rate would result in taxes increasing by $2,000/yr. Since valuation in Ohio is updated every three years, you could be faced with a $6,000 increase (in our commercial example) if the year of increased valuation is the first year of a triennial.  If an appraisal costs, say $2,000, and an attorney will take the case on a contingency basis, the challenge would be worth it.  You basically need to do a cost/benefit analysis for every situation in order to determine if it makes sense to challenge your property’s increased valuation.
II.                II.  Who may File a Real Estate Tax Complaint in Ohio

§ Property owner;

§ An attorney, licensed to practice law in the State of Ohio, representing any party properly before a BOR; and

§ Any other entity named in Ohio Revised Code Section 5715.19 (A).

Background:  At one time, the list of who could file a tax complaint was limited to attorneys and individual property owners, as a result of then current court precedent, most notably, Sharon Village Ltd. v. Licking Cty. Bd. of Revision, 78 Ohio St.3d 479 (1997).  In the aftermath of the Sharon Village decision, the General Assembly enacted legislation (H.B. 694, effective March 1999) that (among other things) expressly authorized certain non-attorneys to file tax valuation complaints on behalf of property owners, namely: (1) spouses; (2) appraisers; (3) real estate brokers; (4) accountants; and (5) officers, salaried employees, partners or members of a corporation or other business firm owner of real property (See Ohio Revised Code Section 5715.19(A)).

Two sub-issues (regarding who may file): Two sub issues have arisen, however, after the supposed clarity that H.B. 694 and O.R.C. 5715.19(A) was initially thought to provide. The first sub-issue centers around what a non-attorney agent may do during the tax complaint process, without being guilty of the unauthorized practice of law. While, at first glance, H.B. 694 appeared to provide some practicality and legal cost savings by allowing a number of non-attorney agents to file real estate tax complaints, the Supreme Court of Ohio in Dayton Supply & Tool Co., Inc. v. Montgomery Cty. Bd. of Revision, 2006-Ohio-5852 clarified that while a corporate officer (or other authorized, non-attorney) may prepare and file a complaint with a local board of revision, without engaging in the unauthorized practice of law, the non-attorney cannot do much else. In other words, corporate officers and other authorized, non-attorneys cannot make legal arguments, examine witnesses or undertake any other tasks that can only be performed by an attorney.

The second sub-issue is whether or not O.R.C. 5715.19(A)  limits non attorney agents who may file complaints on behalf of an owner to those specifically listed in the statute; and if not, what other, non-attorney agents may tax file complaints.

Greenway Ohio, Inc. v. Cuyahoga Cty. Bd. of Revision: The “second sub-issue” discussed above was recently analyzed in Greenway Ohio, Inc. v. Cuyahoga Cty. Bd. of Revision. Specifically, this case involved whether or not a property manager is among the non-lawyers authorized under O.R.C. 5715.19(A) to file a valuation complaint on behalf of a property owner.

In Greenway, the CEO of real estate management company “Property Advisors” prepared and filed (in January, 2016) a tax complaint seeking to lower the value of the property that Property Advisors managed for the owner (Greenway Ohio, Inc.; “Greenway”). The Orange City School Board of Education (“BOE”) filed a motion to dismiss the complaint on the basis that the Cuyahoga County Board of Revision (“BOR”) had no jurisdiction to hear the matter, since Mr. Sweeney, the CEO of Property Advisors was not a person authorized under O.R.C. 5715.19(A) to file a tax complaint on behalf of the owner. The BOR indicated that Mr. Sweeney was not authorized to file (and accordingly, engaged in the unauthorized practice of law), however, the BOR issued a decision on the merits, upholding the then property value of the Cuyahoga County Fiscal Officer. Greenway then appealed to the Ohio Board of Tax Appeals (“BTA”). Without conducting a hearing, the BTA determined that Mr. Sweeney was not a person authorized under O.R.C. Section 5715.19(A) to file a tax complaint, and that therefore, the BOR had no jurisdiction. The BTA then remanded the case back to the BOR with instructions to dismiss the complaint. Greenway then appealed to the Ohio Supreme Court.

The underlying premise of Greenway’s argument is that the list of persons specified in O.R.C. 5715.19(A) is not an exhaustive list and that a management company, as an authorized agent of the property owner should be able to file a complaint on the owner’s behalf. In support of its argument, Greenway cited a 2010 Ohio Supreme Court case that held for the taxpayer, and also dealt with a real estate management company (Toledo Pub. Schools Bd. of Edn. v. Lucas Cty. Bd. of Revision, 124 Ohio St.3d 490, 2010-Ohio-253). The court in Toledo Pub. Schools even acknowledged that the statute’s “list of persons is not intended as a restriction of those who may file a valuation complaint on behalf of an owner.” In fact, the Toledo Pub. Schools court stated that the statute’s intent is the opposite of limiting. The intent of O.R.C. 5715.19(A), according to the Toledo Pub. Schools court is towiden the pool [of persons authorized to file tax complaints]by specifying that certain non-lawyers may file on behalf of an owner in spite of considerations relating to the unauthorized practice of law.”

Notwithstanding this seemingly supportive language to Greenway’s argument, the court in Greenway easily distinguished the Toledo Pub. Schools case as not relevant because in Toledo Pub. Schools, an attorney for the owner’s management company filed the complaint, vs. the management company’s non-lawyer CEO (as was the case in Greenway), and the statute certainly did not intend to prevent lawyers from filing complaints. The court in Toledo Pub. Schools came to this same conclusion by stating: “But when, as in the present case, a lawyer has prepared and filed the complaint, the list of persons who may file on behalf of the owner in O.R.C. 5715.19(A) is not relevant.”

If there is any thought left as to whether or not the “window is still open” regarding authorized agent, non-lawyers filing tax complaints who are not listed in O.R.C. 5715.19(A), the court in Greenway seemed to close any window it may have opened by concluding that “non-lawyers who are not specified in RC 5715.19(A) are not authorized to file on behalf of a property owner.”

III.               III. What is the Moral of this Story?

Don’t get “knocked out of the gate before the race starts.” Hire a qualified attorney to file your complaint and do what lawyers are trained to do (i.e., make legal arguments, examine witnesses, file appeals and undertake any other tasks that can be performed only by an attorney).

If a non-lawyer is determined to have engaged in the unauthorized practice of law, because he/she was not authorized to file a tax complaint, or he/she validly filed a tax complaint (pursuant to O.R.C. 5715.19(A), but then crossed the “practicing law line” during the hearing, the complaint can be dismissed, and if dismissed, you won’t be able to file another complaint until the next tax year.  

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.

Electronically Signed Email Exchange May Constitute Enforceable Real Estate Contract

By: Stephen D. Richman, Esq. - Senior Counsel- Kohrman, Jackson & Krantz
(A Watch Your Language Series Article)

(Watch your language when creating contracts [and when not intending to create a contract])

As established in other “Watch Your Language” articles for this Blog, as a general rule, courts will typically uphold commercial document provisions unless they are contrary to public policy or statutory law, or the subject of a mutual mistake. Courts traditionally presume that commercial parties are on more of an equal playing field and are more sophisticated concerning commercial transactions, since both parties will usually have attorneys to review their documents. More and more, parties to residential real estate contracts are being held to the same standard governing commercial transactions. Because courts often defer to the specific language of real estate documents, unintended results are often the norm for parties who do not carefully draft their documents.

 Because of this judicial deference to “plain language” within real estate and other documents, and the fact that courts, as a general rule will not look outside the four corners of a document (to consider extrinsic evidence of intent) if the language is unambiguous, you must “watch your language, and say what you mean, precisely, or a judge will decide what you meant.”

This watch your language precept is just as (if not more) important in cases determining whether or not a contract has been created, than it is in cases determining the meaning of language within a legally created contract. The Court of Appeals for the First Appellate District of Ohio was recently faced with this very issue in Mezher v. Schrand, 2018-Ohio-3787.

Background of Mezher v. Schrand.

This case involves the alleged sale of a high-end residential property in Mt. Adams, Ohio owned by defendants-appellees Karri and Jeff Schrand (“Seller[s]”). Plaintiffs-appellants Joseph and Mike Mezher (“Buyer[s]”) argued that the Sellers agreed by a series of email exchanges (electronically signed) to sell their home to the Buyers and that the Sellers breached that agreement. The Sellers argued that no agreement existed because of the requirements of the Statute of Frauds.

The email exchange between the Buyers and the Sellers in Mezher started with both parties going back and forth on price. These introductory emails contained a general description of the property (address) and clearly identified the parties. The last three emails in the exchange were as follows:

Buyer (Sept 29, 2017): “However, will split it [price difference] again with you because I want to be flexible. I am good at $982,500 for a purchase price. Based on inception [sic] and customary closing, we can get a simple contract drafted Monday and have it signed by us Tuesday with the earnest money cashier check to you upon acceptance of contract by Tuesday. Please let me know, Mike[.]”

Seller (Sept 30, 2017): “We accept.”

Buyer (Sept 30, 2017):  “Great, I agree too.”

When the parties met on October 5, 2017, an argument ensued, and the Sellers refused to sign a written form contract the Buyers brought with them. The Buyers then filed a complaint against Sellers, requesting specific performance of the real estate contract allegedly established by e-mail exchange. The trial court granted summary judgment in favor of the Sellers, finding that the September 29-30 email exchange between the parties did not satisfy the Statute of Frauds, because the emails did not describe the subject property with particularity. The Buyers then appealed to the Hamilton County Court of Appeals.

What is the Statute of Frauds?

In Ohio (and most other jurisdictions), the “Statute of Frauds” (originating from a 1619 Act of Parliament) basically establishes that certain contracts must be memorialized in a signed writing to be enforceable. Specifically, Ohio’s Statute of Frauds (ORC §1335.05) provides, in pertinent part that: “no action shall be brought …upon a contract or sale of lands… or interest in or concerning them,… unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith...”. There are limited, “equitable” exceptions to the rule, such as “part performance”, “unjust enrichment” and “promissory estoppel” that courts have imposed in order to avoid unfair legal remedies. See “An Oral Contract to Buy Real Estate is not Worth the Paper it is not Written on” — Ohio Real Estate Blog, April 30, 2010.

Does an email or other electronic form of writing satisfy the Statute of Frauds?

Yes. While not contemplated in 1619, the “electronic age of contract formation” has been with us in Ohio since the turn of the century. Pursuant to ORC §1306.06 (C)-(D), if a law requires a record and/or signature to be in writing, an electronic record and/or signature satisfies the law. To erase any doubt with respect to contracts, ORC §1306.06 (B) provides: “A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.”

What writing is sufficient to satisfy the Statute of Frauds?

More perplexing than whether or not a writing exists, is the question of what writing is sufficient to satisfy the Statute of Frauds. The general law in Ohio is that in order for a real estate contract to comply with the Statute of Frauds, it is necessary that the signed contract or memorandum: (1) identify the subject matter; (2) establish that a contract has been made (both parties to the contract must assent to its terms and have a “meeting of the minds” as to those terms); and (3) state the essential terms with reasonable certainty.

What are the essential terms of a real estate contract?

In Ohio, courts have identified the essential terms of a real estate contract as: “the identity of the parties to be bound; the subject matter of the contract; consideration; a quantity term and a price term”. What is not essential? According to recent Ohio court decisions, a written contract for the sale of land need not include the character of the deed to the executed, specify who should pay taxes on the sale or state whether a mortgage must be given to secure the purchase money in order for the contract to still comply with the Statute of Frauds. Additionally, the contract does not violate the Statute of Frauds because the writing does not state a specific date of performance (i.e. closing date) or because of the failure to designate the nature of the interest being conveyed.

Analysis of Mezher v. Schrand.

The court of appeals in Mezher reversed the trial court’s decision, easily concluding that the emails at issue did in fact describe the subject property with particularity. While a list of personal property (appliances, window treatments…) was not specified, the address of the real estate was embedded within the subject line of each email in the exchange and all the other essential terms could be found in the body of the emails. According to the appellate court in Mezher, a list of ancillary personal property is clearly a non-essential term in a contract for the sale of real property.

The appellate court, however, also remanded the case back to the trial court on the issue of whether or not a “meeting of the minds” occurred within the emails vs simply a price negotiation to be followed up by a more complete written contract. Recall that the Mezher email exchange contemplated that the parties would sign a formal document shortly after the email exchange.

As explained by the court of appeals in Mezher, “Given the circumstances surrounding the parties’ email exchange and later discussions, including that other terms of the sale had yet to be agreed upon, an issue of fact exists as to whether the parties had a present intention to be bound at the time of the email exchange, or whether the parties did not intend to be bound until execution of the more formal contract.”

The Mezher court did cite precedent establishing that an agreement can be specifically enforced even where the parties contemplated execution of a later, formal written document, so long as the parties (at the time of the “informal contract”) have manifested an intent to be bound and their intentions are sufficiently definite. The determination of intent, however would be a matter for the trier of fact, not the court of appeals.

What is the moral of this story?

First, “say what you mean, precisely, or a judge will tell you what you meant.” The general rule in Ohio is that when the parties have clearly agreed to the “critical terms” of a real estate transaction, the court may determine on its own the meaning of any ambiguous or uncertain terms. While courts will typically factor in to their decisions, what they believe the parties’ mutual understanding to be, more often than not, a court’s determination does not match up with a party's actual understanding and someone goes home from court unhappy.

Second, there is no hard and fast rule or finite list as to what is and what is not an “essential” term of a real estate contract. While we know that price, identification of the parties and property description are essential terms, and that the closing date and description of personal property are non- essential terms, there are limitless provisions that could be deemed essential by a court of law, the absence of which could render the contract unenforceable. In other words, don’t worry about the number of pages in your contracts, worry about what is reflected within the pages.

Third, the enforceability of a real estate contract containing essential terms depends… on whether the parties have manifested an intention to be bound by such terms and whether these intentions are sufficiently definite to be specifically enforced. Unless absolutely clear in the “contract”, however, the intent of the parties will be based on a fact finder’s (judge or jury’s) evaluation of not only the language itself, but the circumstances surrounding the language. The fact finder certainly will not have a better idea of the parties’ intentions than the parties themselves, but will have the power to nonetheless, make the call. In other words, if you don’t want your preliminary negotiation or letter of intent to be construed as a final contract, spell that out, clearly and definitively. It is no guarantee, but a clear statement that the document “is not intended to be binding” will always be evidence of non-intent to create a binding contract.

Finally, get with the times. These days, contracts can be created in cyberspace, as easily as they can be on a written document entitled “contract.” If you don’t want your emails to be binding contracts, don’t sign them, or better yet, don’t write them in the first place.