Tuesday, August 8, 2017

FYI: 6th Cir Rejects Municipality's "Public Nuisance" Claims Against Mortgage Lender

The U.S. Court of Appeal for the Sixth Circuit recently affirmed the dismissal of a municipality's public nuisance claims against two different mortgage lenders for allegedly maintaining a policy of violating local and state building codes if the costs outweighed the value added to the eventual resale of foreclosed property.


A copy of the opinion is available at:  Link to Opinion


The municipality brought multiple claims against the mortgage lender defendants alleging various claims concerning the maintenance and condition of REO properties.  Eventually, through multiple amended pleadings, stipulations and settlements, only one a common law public nuisance claim remained against one of the mortgage lenders.


As you may recall, a common law public nuisance is "an unreasonable interference with a right common to the general public."  See, e.g., Kramer v. Angel's Path, LLC, 882 N.E.2d 46, 51 (Ohio 2007). 


As stated by the Court, the crux of the municipality's claim is that the mortgage lender adopted a policy of violating local and state property regulations when the cost of compliance outweighed the value that could be recouped through the resale of a foreclosed property.  Notably, through the various pleading stages, the municipality agreed to dismiss any factual allegation which pertained to a specific property owned by the mortgage lender, and as reviewed on appeal, the allegations instead generally concerned the "policy" of the mortgage lender as applied to "additional nuisance properties that will become known to the City" by way of discovery.


The trial court rejected the municipality's common law nuisance claims as a matter of law.


On appeal, the Sixth Circuit began its analysis by first distinguishing between the two types of common law public nuisance - qualified and absolute (a/k/a nuisance per se).  A qualified public nuisance claim mirrors a negligence tort in that it requires the plaintiff to show duty, breach, causation and injury.  The absolute public nuisance itself comes in two forms: the intentional creation of a public nuisance or a condition which is so abnormally dangerous that it cannot be maintained without injury regardless of the care taken. 


Under either form of public nuisance, the Court found several flaws with the municipality's claims. 


As an initial matter, the Court determined that the economic loss doctrine applied to bar its claims against the mortgage lender under the qualified public nuisance theory.  As put by the Court, the economic loss rule bars tort plaintiffs from recovering a purely economic loss that "does not arise from tangible physical injury" to persons or property. Queen City Terminals v. Gen. Am. Trans., 653 N.E.2d 661, 667 (Ohio 1995).  The Circuit Court relied upon two cases from the Ohio State intermediary courts of appeal to determine that the economic loss rule applies to claims arising under the qualified public nuisance theory.  RWP, Inc. v. Fabrizi Trucking & Paving Co., No. 87382, 2006 WL 2777159, *4 (Ohio Ct. App. Sept. 28, 2006); City of Cleveland v. JP Morgan Chase Bank, No. 98656, 2013 WL 1183332, *1 (Ohio Ct. App. Mar. 21, 2013).  For this reason alone, the Circuit Court found that the municipality's claim for qualified public nuisance was properly dismissed.


As for the municipality's absolute public nuisance claim, the Sixth Circuit did not decide whether or not the economic loss doctrine applied under Ohio law because it found that the municipality failed to adequately plead the requisite elements for that claim. 


First, as noted by the Court, the complaint only alleged that the mortgage lender "knew or should have known that they created and maintained a public nuisance."  This language was insufficient to allege the requisite intent required for an intentional claim of absolute nuisance because as succinctly stated by the Court "knowledge does not equal intention." 


Second, the complaint as it came to the Sixth Circuit failed to identify any property owned by the mortgage lender which endangered the public health, safety or well-being.  In other words, the complaint failed to identify any nuisance properties owned by the mortgage lender.  The Court chastised the municipalities attempt to use the discovery process to determine nuisance properties owned by the mortgage lender because "that is not how civil litigation or for that matter nuisance law works."  Instead, nuisance law can be used by a plaintiff "only to remedy an existing nuisance, not to sue someone who may one day own (or create) a nuisance property."  Thus, the Court determined that even under the notice pleading standard the complaint for absolute nuisance was deficient.


The Sixth Circuit also rejected the municipality's argument that the "policy" enacted by the mortgage lender was itself the nuisance.  Although the Court acknowledged that this policy may be probative of the mortgage lender's intent, but the Court found that the "policy" of engaging in a cost-benefit analysis "does not alone constitute a public nuisance."  The Sixth Circuit explained that not every code violation would implicate the public's rights to health and safety, and therefore, not every failure to comply with a code requirement amounts to a public nuisance.  At a minimum, the Court held, the municipality must connect the policy to the existence of an actual nuisance. 


Third, and related to the failure to plead the existence of an actual nuisance, the Court found that the complaint suffered from a proximate cause issue.  The Sixth Circuit determined that the allegations failed to tether its claimed damages of decreased tax revenue, increased police and fire expenditures and increased administrative costs to any specific acts of the mortgage lender.  The Court found it particularly difficult to connect these alleged damages with only a general "policy" of non-conformance and "nearly impossible to disaggregate" these damages from other potential causes of these costs. 


Accordingly, the Sixth Circuit affirmed the trial court and upheld the dismissal of the municipalities claims for common law public nuisance. 





Ralph T. Wutscher
Maurice Wutscher LLP
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