City of Cleveland v. JP Morgan Chase Bank, N.A.

• Decision Date: 21 March 2013
• Docket Number: No. 98656,98656
• Citation: 2013 Ohio 1035
• Parties: CITY OF CLEVELAND PLAINTIFF-APPELLANT v. JP MORGAN CHASE BANK, N.A., ET AL. DEFENDANTS-APPELLEES
• Court: Ohio Court of Appeals

2013 Ohio 1035

CITY OF CLEVELAND PLAINTIFF-APPELLANT

v.JP MORGAN CHASE BANK, N.A., ET AL. DEFENDANTS-APPELLEES

No. 98656

Court of Appeals of Ohio EIGHTH APPELLATE DISTRICT COUNTY OF CUYAHOGA

RELEASED AND JOURNALIZED: March 21, 2013

JOURNAL ENTRY AND OPINION

JUDGMENT:

AFFIRMED

Civil Appeal from the

Cuyahoga County Court of Common Pleas

Case No. CV-668608

BEFORE: Celebrezze, J., Boyle, P.J., and Keough, J.

ATTORNEYS FOR APPELLANT

Joshua R. Cohen

Cohen, Rosenthal & Kramer, L.L.P.

Barbara A. Langhenry

Interim Director of Law

Gary S. Singletary

Assistant Director of Law

City of Cleveland

Department of Law

Andris G. Nikiforovs

Community Housing Solutions

Mark A. Stanton

Short, Shepherd & Stanton

ATTORNEYS FOR APPELLEES

Michael N. Ungar

Isaac J. Eddington

Richik Sarkar

Isaac Schulz

Ulmer & Berne, L.L.P.

FRANK D. CELEBREZZE, JR., J.:

{¶1} Appellant, the city of Cleveland (the "City"), brings this appeal challenging the dismissal of its complaint, which sought damages from several financial institutions involved in the creation of mortgage-backed securities using subprime mortgages from Cleveland, Ohio, real estate. The trial court dismissed the City's complaint pursuant to Civ.R. 12(B)(6), finding that the complaint failed to state a claim and citing three reasons. Here, the City challenges each of those reasons and argues that it has properly pled its claims for relief. After a thorough review of the record and discordant case law, we affirm the trial court's determination.

I. Factual and Procedural History

{¶2} According to the City's complaint, the Cleveland housing market remained relatively flat at a time when the rest of the country experienced rapid price growth. The City alleges that, in an effort to capitalize on this boom in the housing market, several financial institutions — including appellees JP Morgan Chase Bank, N.A., Bank One, N.A., and J.P. Morgan Chase Securities, Inc. (collectively "Chase") — engaged in a practice of encouraging subprime lending in order to package mortgages together and sell them to investors in the form of mortgage-backed securities. The City alleges that these financial institutions were not concerned about the quality of the mortgages backing these securities because, as long as housing prices continued to rise, even bad loans would be covered by assets realized in foreclosures.

{¶3} The City's first complaint alleged that Cleveland was a market where these types of lending and securitizing practices were inappropriate because Cleveland did not experience a steady rise in housing prices. The City claims that the activities of the financial institutions, including Chase, caused a foreclosure crisis in Cleveland that damaged the City and created a public nuisance. The City asserts that Chase knew or should have known the disastrous results these actions would have on Cleveland. Specifically, the City alleges that it has incurred increased costs for fire and safety services as a result of a glut of vacant and foreclosed homes; that the practices led to greatly diminished housing prices, which resulted in huge losses in property taxes; and other costs caused by a foreclosure crisis in Cleveland. The City also brought an Ohio Corrupt Practices Act ("OCPA") cause of action alleging that Chase systematically filed false or misleading paperwork in foreclosure cases indicating that they were entitled to initiate foreclosure actions when they were not.¹

{¶4} The litigation initiated by the City spawned several cases with other financial institutions removing suits to federal court. See, e.g., Cleveland v. Ameriquest Mtge. Sec., Inc., 621 F.Supp.2d 513 (N.D.Ohio 2009). The appellees here are all non-diverse for federal jurisdictional purposes and could not successfully seek removal. See 28 U.S.C. 1332.

{¶5} The City filed an amended complaint incorporating allegations that Chase failed to properly review or process loan paperwork prior to initiating foreclosure actions — the so-called "robosigning" scandal. Chase then filed for dismissal premised on Civ.R. 12(B)(6), citing the same successful arguments raised by other defendants in the federal cases. See Ameriquest. The trial court allowed extensive briefing on Chase's motion to dismiss, and on November 23, 2011, granted the motion citing three reasons also found by the federal district court for the Northern District of Ohio and affirmed by the Sixth Circuit Court of Appeals. See Cleveland v. Ameriquest Mtge. Sec., Inc., 615 F.3d 496 (6th Cir.2010). Regarding the public nuisance claim, the trial court found: "(1) the allegations are insufficient to demonstrate proximate cause, (2) the City's public nuisance claim is preempted by state law, and (3) the economic loss doctrine bars the City's claim." The trial court also held that the OCPA count failed for lack of sufficient proximate cause. The City then timely filed the instant appeal assigning two errors:

I. The trial court erred in dismissing the City of Cleveland's claim for public nuisance.

II. The trial court erred in dismissing the claim alleged by the City of Cleveland under the Ohio Corrupt Activities Act.

II. Law and Argument

A. Standard of Review

{¶6} The trial court dismissed the City's complaint pursuant to Civ.R. 12(B)(6). A motion to dismiss for failure to state a claim on which relief can be granted is procedural and tests the sufficiency of the complaint. State ex rel. Hanson v. Guernsey Cty. Bd. of Commrs., 65 Ohio St.3d 545, 1992-Ohio-73, 605 N.E.2d 378. It is well settled that "when a party files a motion to dismiss for failure to state a claim, all factual allegations of the complaint must be taken as true and all reasonable inferences must be drawn in favor of the nonmoving party." Byrd v. Faber, 57 Ohio St.3d 56, 60, 565 N.E.2d 584 (1991).

{¶7} While the factual allegations of the complaint are taken as true, "[u]nsupported conclusions of a complaint are not considered admitted * * * and are not sufficient to withstand a motion to dismiss." State ex rel. Hickman v. Capots, 45 Ohio St.3d 324, 324, 544 N.E.2d 639 (1989). In light of these guidelines, for a court to grant a motion to dismiss for failure to state a claim, it must appear "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." O'Brien v. Univ. Community Tenants Union, Inc., 42 Ohio St.2d 242, 245, 327 N.E.2d 753 (1975).

{¶8} Because factual allegations in the complaint are presumed true, only the legal issues are presented, and an entry of dismissal on the pleadings will be reviewed de novo. Rocky River v. Lakewood, 8th Dist. No. 90908, 2008-Ohio-6484, ¶ 6. A de novostandard of review affords no deference to the trial court's decision, and we independently review the record. Gilchrist v. Gonsor, 8th Dist. No. 88609, 2007-Ohio-3903, ¶ 16.

B. Public Nuisance

{¶9} The City's main claim was that Chase knowingly created a public nuisance through its securitizing activities. The Restatement (Second) of Torts, adopted in Ohio by Cincinnati v. Beretta U.S.A. Corp., 95 Ohio St.3d 416, 2002-Ohio-2480, 768 N.E.2d 1136, ¶ 8, defines a public nuisance as "an unreasonable interference with a right common to the general public." 4 Restatement of the Law 2d, Torts, Section 821B(1) (1979). The Beretta court went on to define "unreasonable interference" as

those acts that significantly interfere with public health, safety, peace, comfort, or convenience, conduct that is contrary to a statute, ordinance, or regulation, or conduct that is of a continuing nature or one which has produced a permanent or long-lasting effect upon the public right, an effect of which the actor is aware or should be aware.

Beretta at ¶ 8, quoting 4 Restatement, Section 821B(2). At common law, this tort was used to vindicate the interference of a general right the public held, often relating to land use and brought by the state. Faulk Gray, Alchemy in the Courtroom? The Transmutation of Public Nuisance Litigation, 2007 Mich.St.L.Rev. 941, 953-954 (2007). Novel public nuisance causes of action have since been attempted against tobacco companies, asbestos manufacturers, fire arms manufacturers, and environmental polluters with varying degrees of success. Id. Recently, several plaintiffs have used this tool in global warming suits. Id. {¶10} This tort is further broken down into two distinct types — absolute and qualified public nuisance.

With an absolute nuisance, the wrongful act is either intentional or unlawful, and strict liability attaches notwithstanding the absence of fault because of the hazards involved (Metzger v. Pennsylvania, Ohio & Detroit RR. Co., 146 Ohio St. 406, 66 N.E.2d 203 [(1946)], paragraph one of the syllabus), whereas a qualified nuisance involves a lawful act "so negligently or carelessly done as to create a potential and unreasonable risk of harm, which in due course results in injury to another." Id. at paragraph two of the syllabus. A qualified nuisance hinges on proof of negligence. Id.

Beretta at fn. 4. Because a qualified nuisance requires negligence, a party must show a duty owed and a breach of that duty that proximately results in cognizable injury. Id. at ¶ 18.

i. Proximate Cause

{¶11} The City claims it has adequately pled proximate cause because Ohio law generally treats it as a question of fact and an inappropriate reason for dismissal at this stage of the litigation. See Strother v. Hutchison, 67 Ohio St.2d 282, 288, 423 N.E.2d 467 (1981). As the City also points out, proximate cause requires "some reasonable connection between the act or omission of the defendants and the damage the plaintiff suffered." Queen City Terminals v. Gen. Am. Transp. Corp., 73 Ohio St.3d 609, 618, 1995-Ohio-285, 653 N.E.2d 661. However, the tort of public nuisance only reaches so far. Ohio remains a notice pleading state,² but the complaint must still advance a rational basis for holding a defendant liable. Gallo v. Westfield Natl. Ins. Co., 8th Dist.No. 91893, 2009-Ohio-1094, ¶ 9, citing Bell Atlantic...