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Moratorium, Cramdowns & Other Provisions of Ohio House Bill 3: Will They Be Constitutional?

March 30, 2009, 7:38 pm
Filed under: foreclosure, mortgages

Client Advisory

March 27, 2009

Ohio House Bill 3 (H.B. 3), which was introduced in February and remains pending in the state legislature, features the following:

Creates a six-month moratorium on foreclosures of occupied properties
Authorizes state court judges to impose a “cramdown” by reducing the mortgage amount to the current appraised value of the property
Allows defendants to continue occupying their properties after the foreclosure, by paying rent
Increases the filing fee for foreclosure cases by $1,500.00, to create funds to assist distressed homeowners

Hearings on the Bill have been conducted before the Ohio House’s Housing and Urban Revitalization Committee. At a hearing held on Wednesday, March 25th, witnesses questioned whether the Bill would pass constitutional muster. Can a state enforce a law that changes the terms of existing contracts?

The “Contracts Clause” contained in the U.S. Constitution states: “No state shall… pass any… law impairing the obligation of contracts.” In its famous depression-era case of Homebuilding & Loan v. Blaisdell , 290 U.S. 398 (1934), the U.S. Supreme Court upheld a Minnesota state law allowing homeowners to remain in their homes for reasonable rent, because of the emergency that existed at the time. Although some have compared our current crisis to the Great Depression, during that time more than 50% of families with mortgages were in default and unemployment rose to about 30%. Today, only about 10% of mortgages are in arrears or in foreclosure, and unemployment in Ohio is still in single digits.

Since Blaisdell, the U.S. Supreme Court may have lowered the bar by stating that a state law impairing the obligation of contracts might be upheld if it has a “significant and legitimate public purpose and the legislation is reasonably related to that goal.” However, it is questionable whether the court intended that approach to be applicable in all circumstances.

Ohio’s constitution provides a separate basis for a challenge, based on its prohibition against retroactive laws. An argument can be made that all four of the provisions of H.B. 3 may, at least to some extent, be in violation of the prohibition against retroactivity.

In view of these issues, one of the witnesses testifying against H.B. 3 at the March 25th hearing warned the legislature, stating, “I am confident that the issue will be raised and litigated through our court system until the Ohio Supreme Court decides the constitutionality of the statute. It will be a long and costly road to get that determination.”

Further hearings and discussion are anticipated. Weltman, Weinberg & Reis will keep you advised of further developments.

For a copy of the Ohio Mortgage Bankers Association’s Summary of the testimony at the March 25th hearing, go here.

If you have any questions on this information, please contact Mr. Larry R. Rothenberg, Esq. Larry Rothenberg is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., L.P.A. He is the author of the Ohio Jurisdictional Section contained within the treatise, “The Law of Distressed Real Estate”, published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania and Michigan. Larry can be reached at (216) 685-1135 or via e-mail at lrothenberg@weltman.com.

Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A., an organization providing comprehensive creditor representation. The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship. Contact any of our offices or visit our website at realestatedefaultgroup.com for more real estate related information, company facts and attorney profiles. ©2009

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The Dangers of Wrongful Repossession

March 19, 2009, 2:52 pm
Filed under: credit unions, repossession

By: Rob Rutkowski, Esquire

Anthrax Research Federal Credit Union (ARFCU) is a multi-state credit union with approximately 15 branches. Jenny Sharp is a loan officer at the credit union. In March, she writes a $3,000 loan to Stanley Sewer for a 1984 Buick Electra. Stanley agrees to repay the loan at $142/mo payable on the 20th of each month.

During this time period, Stanley is chronically late on his payments and at one point he becomes two months delinquent.

Sewer moves out of state in June and the credit union fails in its attempts to contact him. On June 19th, Jenny decides to repossess the car. On the 23rd, Sewer mailed his May payment to main branch (but this is not the branch where the loan originated). The credit union accepts the payment, but the branch where Sewer’s account was maintained is not notified until a week later. On the 28th, Sewer drives in to see Sharp. Jenny is infuriated with Sewer and tells him: “We do not want your business any longer, we want you to take your business elsewhere! Either you pay up the car now or you don’t get your car at all!” Jenny then has two tellers, Larry and Kerry, throw their bodies in front of Sewer’s car to prevent him from leaving. Sewer, being a Dukes of Hazard fan, does a doughnut in the credit union parking lot and manages to elude the tellers as he roars off in his Buick.

Two days later, Jenny, while out shopping one afternoon, happens to drive past the mall and spies the Buick. Sewer was still in town! She quickly calls Skip, her favorite repossession agent, and by the next morning, the Buick is sitting in the credit union parking lot.

Jenny’s satisfaction is short lived however. She puts the car up for auction and discovers that she can only get $200 for it. Worse yet, she later receives a summons and complaint from Stanley Sewer.

Will Sewer’s case go down the drain?

——
Wrongful repossession is one of the leading reasons that credit unions get sued. There are many different ways that this can happen. This hypothetical situation presents several. First, if a credit union accepts a late payment on a car, it cannot then repossess the vehicle until the loan is again in default and then it has to give notice to the debtor that it will not accept further late payments. Under these facts, by accepting the payment, the credit union waived its right to repossess the car for the particular late payment. In Ohio (and many other jurisdictions) “The acceptance of late payments by a creditor who has the… right to repossess the collateral estops the creditor from lawfully repossessing said collateral after subsequent late payments unless the creditor gives notice to the debtor that, henceforth, strict compliance with the time for payment will be required in order to avert repossession.” See Slusser v. Wyrick, 28 Ohio App. 3d 96, 502 N.E.2d 259 (1986).

There’s also the issue of breach of the peace. In most jurisdictions, a credit union cannot breach the peace in conjunction with a repossession. In Ohio, breach of the peace has been defined to include “an act which is likely to produce violence, which reasonably tends to provoke or excite others to break the peace and which is not performed under judicial process.” See Morris v. First Nat. Bank, 21 Ohio St. 2d 25, 254 N.E.2d 683 (1970). Having tellers launch themselves in front of a car is going to be a breach of the peace. You don’t want to prevent people from leaving the credit union either unless you have a better reason than delinquency.

In the end, ARFCU has exposure here for the parking lot highjinks as well as the later repossession after accepting the late payment. Sewer’s case will definitely pass the smell test.

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