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Knowing who to sue: Pre-Suit Discovery vs. John Doe Defendants in Ohio

Author By Casey A. JonesPosted on

It’s easy to assume that, in order to file a lawsuit, you must necessarily know who you are suing and what you are suing for. This is only partially true.

It is actually not at all uncommon for a party to know that they have been wronged in some manner and know that they have viable legal claims as a result of that wrong, yet not know the identity of the party from whom to seek redress. When this situation arises, there are a couple of options.

Doe Defendants

Civ.R. 15(D) states:

“When the plaintiff does not know the name of a defendant, that defendant may be designated in a pleading or proceeding by any name and description. When the name is discovered, the pleading or proceeding must be amended accordingly. The plaintiff, in such case, must aver in the complaint the fact that he could not discover the name. The summons must contain the words ‘name unknown,’ and a copy thereof must be served personally upon the defendant.”

These unknown defendants will often be identified as “John Doe” or “Jane Doe.”

Petition for Pre-Suit Discovery

On the other hand, Ohio law provides with a process by which they can file a “Petition for Discovery,” which is filed like a complaint but, practically speaking, is more akin to a motion asking the court to order another party to produce certain documents or divulge certain information in response to an interrogatory.

The pre-suit discovery process is governed by R.C. 2317.48, which states:

When a person claiming to have a cause of action or a defense to an action commenced against him, without the discovery of a fact from the adverse party, is unable to file his complaint or answer, he may bring an action for discovery, setting forth in his complaint in the action for discovery the necessity and the grounds for the action, with any interrogatories relating to the subject matter of the discovery that are necessary to procure the discovery sought.

Ohio courts have clarified that “R.C. 2317.48 is available to obtain facts required for pleading, not to obtain evidence for purposes of proof.” Marsalis v. Wilson, 149 Ohio App. 3d 637, 642 (2d Dist. 2002). In other words, this is not a free pass for a party to determine whether he or she has a claim or weigh how strong it may be; it is a limited opportunity to ascertain facts that must be alleged in a proper pleading relative to a claim for which the party already has a good faith basis. In nearly every instance, the missing information being sought is the identity of a potential party.

Civ.R. 34(D) further governs this process with regard to requests for documentation. See generally Huge v. Ford Motor Co., 155 Ohio App. 3d 730 (2004). “R.C. 2317.48 and Civ.R. 34(D) work in tandem to govern discovery actions.” Id., at 734. In order to take advantage of this Rule, the party must first make reasonable efforts to obtain the discovery voluntarily. The petition must include:

(a) A statement of the subject matter of the petitioner’s potential cause of action and the petitioner’s interest in the potential cause of action;

(b) A statement of the efforts made by the petitioner to obtain voluntarily the information from the person from whom the discovery is sought;

(c) A statement or description of the information sought to be discovered with reasonable particularity;

(d) The names and addresses, if known, of any person the petitioner expects will be an adverse party in the potential action;

(e) A request that the court issue an order authorizing the petitioner to obtain the discovery.

Civ.R. 34(D)(1). The court will issue an order for the discovery if it finds:

(a) The discovery is necessary to ascertain the identity of a potential adverse party;

(b) The petitioner is otherwise unable to bring the contemplated action;

(c) The petitioner made reasonable efforts to obtain voluntarily the information from the person from whom the discovery is sought.

Civ.R. 34(D)(3). Note that, under Civ.R. 34(D), that the discovery is needed “to ascertain the identity of a potentially adverse party” is not just a practical effect but, rather, a requirement of the Rule.

Which is best?

If a party can reasonably identify and is merely missing the name of the adverse party or parties or believes they can obtain information from the unnamed parties via discovery once the action is filed, naming a “Doe Defendant” under Civ.R. 15(D) is likely the most efficient route. However, if additional information or documentation is necessary to even begin to identify the adverse party, an action for pre-suit discovery may be warranted.

Statute of Limitations Implications

One common misconception is that an action for pre-suit discovery under R.C. 2317.48 and/or Civ.R. 34(D) or, alternatively, naming a Doe Defendant somehow preserves or tolls the statute of limitations until the party can be identified and the ultimate action (or amended action) brought against them. This is not the case. In 2010, the Supreme Court of Ohio issued its decision in Erwin v. Bryan, holding that it could not, “through a court rule, alter the General Assembly’s policy preferences on matters of substantive law, and Civ.R. 15(D) therefore may not be construed to extend the statute of limitations beyond the time period established by the General Assembly.” 125 Ohio St. 3d 519, 525 (2010). “Civ.R. 15(D) does not authorize a claimant to designate defendants using fictitious names as placeholders in a complaint filed within the statute-of-limitations period and then identify, name, and personally serve those defendants after the limitations period has elapsed.” Id., at 526.

While Erwin does not make as explicit of a finding as to R.C. 2317.48 and/or Civ.R. 34(D), its inclusion of these rules in the same discussion, as well as the nature of such rules (contemplating an action exclusively for discovery and not naming the adverse party or parties, as they cannot be ascertained without the same) strongly suggests an identical result. Indeed, the statute of limitations is intended to encourage parties to be diligent in investigating their claims and, if the identity of an adverse party is in question, the spirit (and, likely, the letter) of the law would require such party to initiate a discovery action with sufficient time to obtain the discovery and then bring the ultimate action.

 

 

Pins and needles

Author By Christopher P. FinneyPosted on

In pre-litigation and litigation, we frequently have clients who are understandably anxious to resolve their disputes.  They typically are concerned with the open-ended liability that can result from a claimed breach of real estate contract or a business deal gone bad — and the legal fees that inevitably will come from them.  And as a result of that unknown exposure, they want swift finality to the matter.  They are constantly on pins and needles to close this small chapter of their life.

A good settlement versus a quick settlement

Unfortunately, getting a good resolution frequently is inconsistent with the desire for a quick resolution.  Patience, many times, is a virtue that pays good dividends.  This does not mean we typically recommend litigation as a solution.  Litigation is lengthy, unpredictable and terribly expensive, and is accompanied by the same sense of unease until that long course to resolution.  But the other side can sense when you are anxious to put a dispute behind you — attorneys are especially good at dragging things out to achieve a more favorable resolution than the courts would provide to them precisely because of that desire of the opposing party for quick closure.  Showing that insistence on a quick and final settlement can drive up the cost of a resolution exponentially.  So, slow down.  Relax.

Why the anxiety?

The nature of our legal system is that we frequently need to give “lawyerly” answers to what seem to be simple questions:

  • Am I liable?
  • What is the extent of my financial exposure?

These vague answers are so because many times the answer from a review of the documents and a review of the correspondence and oral exchanges leave a conclusion unclear.  Many times — most times — clients don’t tell us the whole story.  Sometimes, we are wrong.  And even if we as attorneys can give a clear anticipated outcome and we are correct in our analysis, the Judge (or Arbitrator) may in the end not agree with us.

We read the documents and do our best to understand the facts, and conclude: “Your exposure should be limited to ‘X,'” but the Judge may later conclude it is “X” times 3.5.  And that is so because we can be wrong or the Judge can decide the case incorrectly (in our opinion).  Further, we conclude “the fees and expenses to get to that conclusion should be ‘Y,'” but opposing counsel and judges can make the odyssey much more expensive.

Perhaps my bedside manner makes clients uneasy because I do have and share “worst case scenario” war stories where liability and legal fees well exceed that which should reasonably be anticipated.  But for every one of those legal calamities, we have 20 or 40 cases that resolve quickly and fairly, if not inexpensively.

So, relax

I recently was consulted by a physician who had contracted to purchase a small investment property, and he had decided he contractually  agreed to pay too much and wanted to back out of the deal.  He was more or less crawling out of his skin to have resolution of the matter — and his total exposure if he was in fact found to be in breach of the contract was on the order of maybe $20,000.  And this was the worst case for him.

But he was anxious, and called me four or five times in a two-day period stressing about this “what if” and that “maybe” scenario.

I asked him: “You are a doctor.  What kind of doctor?”  He responded: “I am an oncologist.”  So I said: “OK, let me understand.  Every day you have to tell someone — and their family — that they or their loved one has cancer.  Is that right?”  He says: “Correct.”  And, I further inquired: “Yet you are stressed about a simple contract claim that might cost you $10,000 or $20,000 if you ultimately are sued, is that right?”  “That’s right,” he responds,  “But I see your point.”

Another case I have my client terminated a residential purchase contract because the strict terms of the financing contingency were not met — the bank had a higher interest rate and a higher down payment than the contingency contemplated. The buyer sent a contract termination letter and the seller responded with a rejection of that — but then just sat and sat and did not place the house back on the market — at least not right away.

I explained to the client that “these almost all work themselves out without litigation.”  Further, he has an appraisal of the property at the purchase price.  If that is the value that would be adopted by a court in litigation, then the seller has no damages anyway.  Further, if they refuse to place the home back on the market, the seller will have violated his duty to “mitigate his damages,” weakening the seller’s claim in court.

Still, the client and his wife are anxious, concerned about the many possible outcomes to the suit.  And we don’t as of this writing know exactly how it will turn out.

Conclusion 

No one has cancer.  No one lost an arm or an eye.  No one is going to die.  You are not going to end up in bankruptcy court as a result of this contract claim.  Be patient and allow the other side to work out their “mad” and realize the cost and time that litigation will take.  It will all be OK.  That does not mean fighting until the last breath and last dollar is the best strategy, but being somewhat patient as a settlement works its way out can be advisable.

Stephen Imm

Ohio Employment Law: When is a Disabled Employee Entitled to a Leave of Absence as an Accommodation of his or her Disability?

Author By Stephen E. ImmPosted on

The Americans with Disabilities Act and state law both require employers to provide reasonable accommodations to their employees, if they are necessary to allow the employees to perform the essential functions of their jobs. These accommodations can take many forms. They can involve supplying equipment, removing barriers, restructuring an employee’s job, modifying his or her schedule, etc.

What if an employee needs a leave of absence because of a disability? For instance, what if they need time off due to a flare up of their condition, or to recover from a disability-related surgery or treatment? This obviously requires the employee to be away from work entirely during the leave of absence. Does an employer have to provide this kind of accommodation, essentially allowing the employee to not work for a while, and then return him or her to the job they held previously?

The answer is “yes,“ as long as certain conditions are met. First, the amount of the leave requested be reasonable, and it cannot be indefinite. The employer is entitled to know approximately when the employee will be able to return. Second, if the leave of absence requested would impose an undue hardship on the employer, the employer does not have to provide it. So if the employer can show that doing without the employee for the period of time requested would do harm to the employer’s business, it may not be necessary in that circumstance for the employer to accommodate employee’s request for leave.

It is important to note that the employer does not have to provide paid leave in these situations, and can require the employee to pay for the cost of keeping their insurance in place while they are off.

Obviously, questions about whether a particular leave of absence is a “reasonable accommodation” can be tricky. Both employers and employees should get qualified legal representation when addressing these kinds of issues. Making mistakes in this arena can be very costly, and can result in significant damages if the wrong choice is made.

As to code enforcement and nuisance actions we strongly recommend “comply”

Author By Christopher P. FinneyPosted on

Friday, our founder Christopher Finney was featured on a panel presentation before the Cincinnati Bar Association on “Code Enforcement from the Municipal Perspective.”  The panel included Erica Faaborg, Deputy City Solicitor of Cincinnati, Kathy Ryan of Wood and Lamping, and Stacey Purcell of Legal Aid of Cincinnati.

The panel discussion covered a wide range of code enforcement and nuisance actions, many of which fall outside the scope of what Finney Law Firm typically would handle such as slum landlords without heat and tenant hoarding.

Our primary experience falls in two areas: (i) Chronic and acute health and building code violations, with the municipality typically seeking an injunction and a fine against the property owner and (ii) nuisance actions seeking either the forced closure of the nuisance business (usually either a motel or a liquor establishment) or the appointment of a receiver to manage, fix up and sell a property.

In both instances, in nearly every jurisdiction in question, the municipality is simply seeking compliance.  In most instances, they neither want your money nor control of your property. They want the nuisance conduct (underage drinking, violence, drug dealing, prostitution) stopped or the the property fixed up.  Period.

As three starting points, commonly I advise:

  • Maybe our client has a legitimate defense, the nuisance does not exist, is not as exaggerated as the municipality claims, or we have an over-zealous building inspector picking a fight with a single property owner. But (a) this usually can be worked out (as their objective typically is compliance, we universally find they are clear and reasonable when asked to be) and (b) the Judge who will hear the case lives in our community and typically wants zealous code enforcement — we all want to live in a nice community, right?  As to judicial matters, these are “police powers” enforcement and the Judge almost never wants to second guess the City in a code issue. It will be very hard to overcome the presumption that the City is being reasonable in its enforcement.
  • Even if the client is right, the risk of lost and cost of litigation pales in comparison to the cost of fixing up the property or abating the nuisance.
  • And, worst of all, if the City is victorious in seeking the appointment of a receiver for your property, it’s “game over” for the property owner in terms of preserving any value from — any equity in — the property.  Why? Because the lawyers and receiver take over the property, repair it at your expense, charge their professional fees to the project and pay themselves from the income and proceeds, and sell the property quickly for what they see as a fair price to a new operator.  You can kiss your years-developed, hard-earned equity goodbye.  In the case of liquor establishments, if you are ordered closed, your millions of dollars in capital to develop and promote an establishment are out the window if you are forcibly shut down.

As a result, we strongly recommend working with building officials toward a reasonable compromise for enforcement — it can end the dispute, it improves the property or its operation, and it makes our communities stronger.  More importantly, in in the long measure, it saves the client money by investing in his property or business rather than running up a huge — and likely non-productive — legal tab.

Having said all of this — and we do counsel compliance and cooperation — a business owner or property owner does not need to just “lay down” for expensive and over-the-top enforcement.  Our firm has fought and won amazing battles against State and local governments, all the way to the US Supreme Court.  We have successfully challenged entire legislative schemes, including pre-sale and pre-leasing inspections, which are a constitutional overreach, in multiple jurisdictions.  Our firm has made a name for itself fighting and winning against bad government actors.  Our tools include the US and State Constitutions, state statute, the State of Ohio taxpayer statutes against both cities and county commissions, Open Meetings laws, Public Records laws, and other statutory avenues.  But before launching into these battles, we want to make sure we are positioned to win and that the client appreciates the costs and risks for undertaking these fights.

Today’s NYT: Insurance coverage, “You’ve got to provide notice early and often”

Author By Christopher P. FinneyPosted on

Today’s New York Times has an instructive tale in insurance coverage in a high-profile U.S. Supreme Court case.  There, Harvard University is embroiled in expensive and protracted litigation over its affirmative action policies.

For such litigation, it had an initial $2.5 million deductible under its primary carrier, and then $25 million in primary coverage.  It however, failed to notify its “excess coverage” carrier, which provided an additional $15 million in coverage.  Because the litigation lasted so long and cost so much, that failure to timely notify the carrier — a policy requisite — it may have deprived itself of that needed $15 million in coverage.

The lesson, as quoted in the article, is, as to coverage: “you’ve got to provide notice early and often.”  Our position is: “When in doubt, notify.” (Clients are rightly concerned that notice causes increased rates and/or cancelation.  Our experience is different: If you are an overall responsible insured, even with occasional claims, even meritorious claims, it should not impact rates or coverages, or if so not greatly.)

The matter is pending in court, and in the hallowed halls at Harvard the question of whether someone is going to lose their job is open as well.

Our favorite Courts reporter — really focused on the US Supreme Court — Alan Liptak, brings us this report.

Julie M. Gugino

“Perfect” legal solution to getting out of property co-ownership in Ohio

Author By Julie M. GuginoPosted on

Legal disputes are rarely cut-and-dried to the point that the other party is without any legal defense to the action.  It seems there is always something about which to argue (read here, for example).  But it certainly seems to us — by reading the statute and by using it — that a statutory partition action in Ohio (O.R.C. Chapter 5307) is just such a “perfect” solution.

Two or more parties own property; one or more parties wants “out”

In this case, the statute addresses the issue where two or more parties own real property together but cannot agree if or when to sell it.

We are not addressing multiple shareholders in a corporation that owns real property or co-members of an LLC that own real property, but two or more parties named as grantees in a deed who own property together (known in the law as co-tenants).  Those shareholder or member disputes are handled in another manner.

Perfect power of partition

In short, in a partition action, one party can force the judicial sale of the property to the highest bidder with the net proceeds divided among the co-owners (the parties may argue, and this firm has argued about proper adjustments to the distribution of net proceeds).  There is no defense to the action although the process can take time as the Court permits discovery over the course of the partition proceedings.  However, the right to partition of jointly owned property is statutory – if one party brings the action, the property will ultimately be judicially sold.

How to proceed to partition

Thus, if you own property jointly in Ohio and you want to liquidate your interest (for any reason at all or for no real reason at all), but the other party or parties do not wish to sell what are your options?

For this situation, let’s assume two things:

  • The co-owners are not married as that would be handled in Domestic Relations Court.
  • There is no written agreement, what we call a co-tenancy agreement (see here), whereby the parties have established in writing how they will handle disagreements between them as to how the property will be held and disposed.  In that case, the agreement likely will control.

Then, what options do you have to resolve differences over the ownership and disposition of jointly owned real estate? The answer lies in an action in partition.

What is partition?

A real estate partition is a formal legal proceeding through which a joint owner of real estate can ask the court to split the property.   An “action for partition is equitable in nature, but it is controlled by statute.”  McGill v. Roush, 87 Ohio App.3d 66, 79, 621 N.E.2d 865 (2d Dist. 1993). A Partition Action is a lawsuit which existed at the common law for the purpose of passing down family farms.[1] When the heirs could not agree on how to run the farm together, one or more could commence a partition action, asking the court to fairly divide the farm between the heirs. Partition of the property itself is favored over sale and division of proceeds, however a property may be sold if it can be shown that it cannot be divided without manifest injury.[2]

Sale if property cannot reasonably be divided

Thus, a party can ask that the property be sold if it is determined that it cannot be divided. Certainly, this is the usual case for typical residential properties today. In this situation, the Court will appoint a commissioner or commissioners under O.R.C. § 5307.09.  When the commissioner(s) are of the opinion that the estate “cannot be divided without manifest injury to its value” they will provide a “just valuation of the estate” to the Court. One or more of the parties can elect to take the estate at the appraised value and pay to the other parties their proportion of the same. Alternatively, if neither party desires to purchase the property or cannot agree on the proportionate purchase of the same, the property will be sold at auction to the highest bidder.  Often, cases are resolved and settled among the parties prior to this occurring.

Under O.R.C. §5307.07, when partition of more than one tract is demanded, the Court will set off to each interested party its proper proportion in each of the several tracts. Thus, when multiple parcels of land are owned jointly, the separate parcels can be conveyed to separate owners so that each owner will have total control over their now separately owned parcel.

If a property was acquired upon someone’s death, a partition cannot be ordered within one year from the date of the death of the decedent, unless it is proven that either (i) all claims against the estate have been paid, (ii) secured to be paid, or (iii) that the personal property of the deceased is sufficient to pay those claims.

Attorney’s Fees

Under O.R.C. §5307.25, reasonable attorney’s fees can be paid from the proceeds of the sale to Plaintiff’s counsel and may also be paid to “other counsel for services in the case for the common benefit of all the parties” as the Court determines.

Conclusion

Thus, a Partition Action can be used to force the sale of jointly owned property where a recalcitrant party refuses to act.  Partition is a powerful tool to unwind and unstick a longstanding problem with a co-owner that will not budge.

 

______________________________________

[1] The Appellees assert that the “Commissioner made a good faith effort to partition the Property, but there is no way to physically divide this family farm into four sections based on the lack of frontage, the inconsistent and varying nature and uses of the land, and the physical location of the parcels. Simon v. Underwood, 2017-Ohio-2885, ¶ 65 (Ct. App.).

[2] “Since the partition of property is to be favored over the sale of property, when a party objects to a commissioner’s report, that party should have a right to a hearing to contest the commissioner’s findings before the property is appraised and subsequently sold.” Stiles v. Stiles, 3d Dist. Auglaize No. 2-89-3 (May 10, 1991)]. Court must comply with statutory procedures to appoint a commissioner, make an independent valuation and recommendation regarding whether the property could be divided without a manifest injury to the property’s value and providing a joint owner opportunity to elect the property, and no was provided. Thrasher v. Watts, 2011-Ohio-2844, (Ohio Ct. App., Clark County 2011).

Ohio Employment Law: When does a “Hostile Work Environment” violate an Employee’s Rights?

Author By Stephen E. ImmPosted on

The term “hostile work environment“ is thrown around a lot these days. It is not just a phrase used by employment lawyers and judges. It has become a part of the lexicon of the general public. In the same context, one often hears references to a “toxic work environment,“ or to “bullying“ in the workplace.

A lot of folks are under the assumption – not an unreasonable one – that it is illegal for employers to create a “hostile work environment“ for one or more employees, or to allow such an environment to exist in the workplace, or to not eliminate such an environment once an employee complains about it.

It surprises a lot of people to find out that a hostile or toxic work environment is not always illegal, or something with which the law concerns itself. In fact, a work environment can be very “hostile“ or “toxic“ without being against the law. Furthermore, whether or not a hostile work environment is illegal does not depend on exactly how hostile the work environment is. It is not that “mildly“ hostile environments are not illegal, but “severely“ hostile environments are.

As far as the law is concerned, the determination of whether or not a hostile or toxic work environment is illegal depends upon the motivation for the hostility or toxicity. If the employer or supervisor creating the unpleasant environment is motivated by factors like an employee’s race, sex, sexual orientation, age, religion, or disability, it may very well be unlawful, and grounds for a lawsuit.

If, however, the hostility comes from another source – such as a personality conflict or personal disagreement – the resulting work environment, no matter how toxic or unfair it may be, it’s not legally significant.

This can seem very unfair, but the law sometimes tells an employee who is being subjected to a hostile or toxic work environment, “Hey, you don’t have to keep working there. You can always go find another job.“

A smart employer, of course, is always going to want to create a good working environment for its employees, for a wide variety of reasons. So regardless of the legalities, addressing issues of hostility or toxicity in the workplace is always a good idea.

If you are an employer or employee confronted with issues relating to a hostile or toxic work environment, it would be wise to get advice from a qualified employment lawyer.

Major survey “fails”: They happen

Author By Christopher P. FinneyPosted on

I recently received a plat of survey from a client for a 90-year-old two-family residence he had purchased.  (Survey obtained after the closing.)  It showed several things:

  • The building encroached 8′ onto his neighbor’s property;
  • In addition, there was a walkway and retaining wall the projected even further onto his neighbor’s property; and
  • The home projected 6′ into the public right-of-way (a “right-of-way” is the land owed in “fee simple” or by easement by a governmental entity for roadway and sidewalk purposes (such as through dedication); it is usually much wider than the actual paved area for either).

Now, that’s a hot mess of title and survey issues.  What to do?  What to do?

Get a survey before a purchase

Well, for starters, this is great example of why a buyer needs a survey in addition to a title examination before purchasing real property.  None of these problems would be evidenced by a title examination.  Only a field survey would show these encroachments.  Further, title insurance does not cover these occurrences.

Excuses and justifications

As a side note, we hear over the phone and in the closing room the 25 reasons why a buyer, lender or Realtor does not think title insurance or a survey is needed:

  • The property is “new” (i.e. a new subdivision, with newly-constructed houses);
  • The property is “old,” meaning the homes, garages, driveways and other improvements have existed for a long time.
  • Certainly the seller checked the title and survey, so it is fine.

None of these is a good reason not to get title insurance and a survey.  We can explain further if you like.

Other survey nightmares

In addition to the problems identified above, we have seen other major survey problems:

  • A new house built in violation of a zoning or covenant setback.
  • An entire subdivision where each house was built 5′ onto the neighbor’s property (and thus needs re-platting, deeding the 5′ to the correct owner, a release of the “wrong” mortgage and a re-filing of the correct mortgage).
  • Condominiums where the unit numbering was changed from the time the contract was signed to the time when the condominium documents were file (and thus many units were mis-numbered and every unit needs a new deed, a release of the “wrong” mortgage and a re-filing of the correct mortgage).
  • A complete misunderstanding (or misrepresentation) of the location of property lines.
  • Encroachments (e.g., fences, sheds, utilities) of various improvements onto our client’s property.
  • Encroachments of various improvements from our client’s property onto their neighbor’s property.
  • An easement that runs right where your client intends to build on otherwise “raw land.”

Solutions

For the client noted above, he has several remedies to the problems.

  1. First, did he purchase title insurance?  If he did, he may have a claim — but probably not.  Why not?  For starters, title insurance provides coverage for the insured premises, not for property outside the boundaries of the insured premises.  And by definition, the three problems he called about are outside of the metes and bounds of the property he acquired.  Moreover, the standard title insurance policy specifically excepts coverage of matters that would be disclosed by an accurate survey, and as a rule that exception to coverage is not deleted (and thus coverage provided) without a survey certified to the title company.
  2. Second, did he get a general warranty deed from the seller, the most common form of deed in use in southwest Ohio certainly?  If so, he may (may) have a claim against the seller for breach of the contract and breach of the general warranty covenants.
  3. Third, as to the first two issues (the encroachments onto the neighbor’s property he almost certainly has a strong case for a claim to ownership of the property through “adverse possession.”  You may read a detailed analysis of that here.
  4. Fourth, however, as to the portion of the property in the public right-of-way, the client has a difficult row to hoe.  One may not adversely possess against a governmental entity in Ohio.  The only way to perfect title to the portion of the building in the right-of-way is to seek a deed (or statutory street vacation) from the governmental entity whereby they voluntarily surrender that title to the property owner.

Conclusion

The saying “an ounce of prevention is worth a pound of cure” is appropriate here, as it is with all due diligence investigations before the purchase of real property.  The buyer should have “kicked the tires” with a good surveyor before closing on the sale.  But this is the situation now. So, he can pursue the seller and the neighbor to vindicate his rights to the home and walkway.  As to the governmental entity owning an interest in the right-of-way, he simply needs to work the ropes to see if it will relinquish its interest in his home.

 

 

Clermont property buyer gets tagged with $682,000 extra tax bill; litigation ensues

Author By Christopher P. FinneyPosted on

The purchaser of an apartment building Clermont County and his counsel are learning the lessons of real property taxes — and the ways to handle tax prorations —  the hard way.  Because neither the seller nor his attorney thought through the transaction carefully, the purchaser (a) lost $682,000 in tax proration negotiations and (b) has suffered what appears to be an entirely unnecessary increase in the same amount in his annual real estate taxes, essentially forever.

How can outcomes between savvy and clumsy real estate transactional work vary so dramatically?

Underlying facts

On December 28, 2021, RS Fairways, LLC closed on the purchase of Fairways at Royal Oaks, an apartment complex in Pierce Township on Clermont County for $32,600,000.  The Auditor’s valuation at the time of the sale was $6,622,000.  The difference between the sale price and the Auditor’s valuation was $25,977,700, a whopping 500% increase.

Following the sale, our former Associate, Brian Shrive — who now heads the civil division of the Clermont County Prosecutor’s office — on behalf of the Prosecutor, saw the conveyance fee form filed with the deed reporting the whopping sale price-compared-to-Auditor’s-valuation and filed \a Board of Revision Complaint to increase the valuation — retroactively to January 1, 2021 — to the sales price.

Almost inexorably, the Board of Revision would have so increased the value, so the owner, the Prosecutor and the School Board later entered into a Stipulation as to the new valuation at $32,600,000.

Tax proration language

As we have written about here (just one month before this buyer closed; he should have read our blog!), standard tax proration language in use in the Cincinnati area calls for a tax proration to be based upon the most recent available tax duplicate.  Since the Auditor and School Board will not know about the sale until after the deed is recorded, current taxes can’t possibly be based upon the sale price.  Here, the Auditor obviously had a grossly outdated and inaccurate valuation.

In other words, standard and customary contract language in use in greater Cincinnati simply does not adequately protect the purchaser in a situation where it is paying much higher than the Auditor’s present valuation.

The Contract in question provided:

If the 2021 tax bill is not available as of the Closing Date, then the proration described in clause (b) above shall be based on the 2020 tax bill for the property.

Why do we prorate taxes in Ohio?  Taxes in Ohio are paid “six months in arrears at the end of the period.”  What does that mean?

It means that the first half 2021 tax bill is issued in January of 2022 and the second half 2021 tax bill is issued in July of 2022.  Therefore as of the date of closing (here, the end of December 2021), the seller owned the property for all of 2021, but hadn’t paid the taxes for 2021.  Therefore, at closing (under local contract form and custom) the seller prorates to the buyer the taxes for the period it had owned the property, but at existing tax and valuation rates.

The dual problems are: (i) if there is a change in the tax rate for 2021 (such as with the passage of a school or other levy), the proration will be wrong as to the 2021 rate and (b) if there is a change in the tax valuation in the normal triennial cycle, the valuation (and thus the taxes) will change, and, here’s the kicker, (c) well after the closing, a school board or the County Prosecutor have the right to ask the Board of Revision to retroactively, back to the beginning of the prior tax year, change the valuation to a reported sales price.

And, as Casey Jones of our office blogged here, a recent arm’s length sale is uncontestably the valuation for tax purposes.

Thus, under the law, a purchaser is liable for taxes calculated at the tax amount for the taxes for the periods from the date prior to the sale (based upon the next tax bill to be issued) and into the future.  And this new tax rate calculates in “unknowns” at the time of the closing, which are a change in rate and a change in valuation.  Both of these can be both assessed, and as to the valuation, can be contested and litigated, well after the sale, but the retroactive liability for those taxes falls on the new property owner.

“Forever” increase in taxes

The tax proration flub — a $682,000 mistake — was bad enough, but worse is that the reported sale will result in a new baseline valuation for future taxes of $32,600,000 for a property that previously was valued and taxed at just $6.2 million.  Every three years the County will start with the $32 million number and make (likely) increases from there, so this owner will have $700,000 in higher taxes (than likely he anticipated) forever.

Could the massive increase have been prevented?

Two fairly sophisticated legal techniques could have been employed by this purchaser to avoid these massive “surprise” tax bills.  One would have spared them the cost of the under-proration, and the second could have resulted in a permanent savings — tens of millions to the purchaser’s bottom line.  They employed neither.

First, when a purchaser pays an amount significantly above Auditor’s valuation for property (this is a simple task of comparing the sale price to Auditor’s valuation [a quick on-line check]) before the contract is negotiated and signed, a purchaser will want the tax proration language to include a re-proration after the final taxes for the year prorated are known.  [By the way, when we get into an environment of declining values, the inverse rules as to tax proration can apply — the purchaser will have an advantage in the proration process — an over-proration —  if the contract language is not modified.]

Second, a technique is available in Ohio (but not Kentucky) to have the seller first transfer the property into an LLC that he owns exclusively (by deed, but with an “exempt conveyance fee form,” so that no sales price is reported) and then, at the closing between seller and purchaser, the seller transfers his interest in the LLC to the purchaser — and thus there is no recorded deed.  These transfers are referred to as “drop and swaps” or “entity transfers.”  In this situation — with some possible exceptions, the Auditor and school board are not put on notice of the sale or the sale price, and thus the increase in value could slip by unnoticed.

Here, the purchaser employed neither technique resulting in a bad proration and “forever” tax liability.

Ensuing litigation

Despite terrible tax proration language that we see as “fatal” to the purchaser’s claims (see above, they agreed to base the proration on the 2020 tax bill, period), the purchaser has sued the seller for a re-proration based upon the post-closing tax “surprise.”  Good luck with that.  See the Complaint here.

Conclusion

Smart advance legal planning by a purchaser or seller can dramatically change the outcome as to taxes in a real estate transaction.  Contact Isaac T. Heintz (513.943.6654) or Eli Krafte-Jacobs (513-797-2853) for assistance on your real estate transactions to avoid these disastrous outcomes.

How Recent Sales Affect Your Property Taxes

Author By Casey A. JonesPosted on

Most property owners recognize that the real estate taxes they pay are directly tied to the county auditor’s assessed value of their property. What most do not understand, however, is how those values are determined. In short, auditors in Ohio are tasked with reappraising all real estate in the county ever six years, with “updates” every three years. R.C. 5715.24.

As one might imagine, this is not an easy task, especially in more populous counties. Auditors use a variety of methods and technologies to assist them with appraising and updating the values in their counties. One of the most common and most accurate methods utilized is an examination of recent sales. This does not refer to recent sales in the area (i.e., comparable sales or “comps”)—that is a different method—but, rather, a sale of the actual subject property.

In Ohio, a recent sale of the subject property is “rebuttably presumed to be the true value and represents the best evidence of true value.” Amherst Marketplace Station, LLC v. Lorain Cty. Bd. of Revision, 2021-Ohio-3866, ¶ 10 (emphasis added), citing Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, 150 Ohio St.3d 527, 535 (2017). See also R.C. 5713.03. In other words, “[t]he use of a recent arm’s-length sale price is [] the favored means of determining value for purposes of taxation.” Amherst, at ¶ 10. However, this presumption is subject to rebuttal via evidence that the sale was either (a) not at arm’s length or (b) not recent. Id.

What is an “arm’s length” transaction?

For purposes of R.C. 5713.03, an “arm’s length sale” is “a voluntary sale without compulsion or duress, that generally takes place in an open market where the parties act in their own self-interest.” Buck Warehouses, Inc. v. Bd. of Revision, 2d Dist. Montgomery No. 2007-Ohio-2132, ¶ 13, citing Walters v. Knox City Bd. of Revision, 47 Ohio St.3d 23, 25 (1989). Put simply, the inquiry is: What would a willing buyer pay to an unrelated, willing seller for this property on the open market? Of course, the presumption makes sense in this context—obviously, a buyer would pay what a buyer did pay.

What is considered a “recent” sale?

The recency question is a bit more complex. The Ohio Supreme Court appears to say that courts (or taxing authorities) are not “compelled” to presume the recency of a sale that occurs more than 24 months before the tax lien date. See generally Akron City Sch. Dist. Bd. of Educ. v. Summit County Bd. of Revision, 139 Ohio St. 3d 92 (2014). The “tax lien date” is most easily understood as January 1 of the tax year in question. While the Akron case appears to set a “bright-line rule” as to how recent a sale must be in order to be afforded the true value presumption, the Court qualified it by saying that recency should not be presumed relative to a sale that occurred more than 24 months before the tax lien date, “when a different value has been determined for that lien date as part of the six-year reappraisal.” So, if the auditor determines that a value other than the sale price applies, then that sale price (more than 24 months old) cannot be used to create a presumption of the true value of the property.

Regardless of whether a prior sale is sufficiently recent to trigger a presumption as to the value of the property, even older sales are important to the determination of the true value. The Ohio Supreme Court has held that, even where sales are too remote to be afforded a presumption of value, they are “some indication of true value” and “should [be] taken into account.” Dublin-Sawmill Properties v. Franklin County Bd. of Revision, 67 Ohio St. 3d 575, 576-77 (1993) (emphasis added). Similarly, the First District Court of Appeals has held that taxing authorities act appropriately in “considering evidence of [a] sale . . . in making [their] determination of value” even where the sale was not sufficiently recent to create a presumption of value. Othman v. Bd. of Educ., 1st Dist. Hamilton Nos. C-160878, C-170187, 2017-Ohio-9115, ¶ 22.

What does all of this mean for property owners?

Practically speaking, this body of law affects the average property owner in two ways: (1) preparing for a potential increase in property taxes relative to recently purchased property, and (2) knowing the available options relative to tax appeals.

The first scenario is perhaps most common in the current, booming real estate market. Consider the following:

You purchased a home in May 2019 for a purchase price of $350,000.00. The county auditor’s assessed value of the home was $180,000.00 as of the date you purchased. In 2020, the auditor increases your value to $350,000.00.

(Side Note: Many homeowners are pleased when the auditor increases the value of their home because they think it corroborates the investment they made and demonstrates that they now own a more valuable piece of property. While this makes sense, it is also important to consider that this value is what sets the amount of property taxes for which the owner will be responsible. In short, the higher the value, the higher the taxes.)

In the above example, your property taxes will nearly double if the auditor catches the sale and adjusts the value to the sales price. This is not inherently unfair. Notwithstanding the rising sale prices, that is what you paid for the property so you must have thought it was worth that. But it is important that buyers are aware of this near inevitability, go into the transaction with eyes open, and have the means to properly deal with its implications.

The second scenario will likely be less common with the recent passing of HB 126 (significantly restricting school districts’ ability to file tax complaints seeking an increase in the value and, thus, taxes paid by property owners in their districts).

Your property is and has been valued between $430,000.00 and $450,000.00 from 2008-2018. You bought the property on the open market for $515,000.00 in 2018. In 2019, you receive a notice in the mail that the value is being increased to $515,000.00 (to match the sale price). Three years later (in 2022), you receive a similar notice increasing the value to $800,000.00. You haven’t made any material improvements to the property. What are your options?

Here, this is an arm’s length transaction. However, you purchased the property nearly three years prior to the “tax lien date” (Remember: 2022 tax bills relate to Tax Year 2021, so the “tax lien date” is 1/1/2021). Under the precedent set in the Akron case, you aren’t entitled to a presumption of value based on the sales price. However, the sale price is some evidence of value that any reviewing authority should take into account. These considerations are important in deciding whether to file a Complaint with the Board of Revision to challenge your value.

Our firm’s experienced attorneys represent real estate investors, property owners, and tax payers relative to these issues and can help you navigate the best option(s) for your individual circumstance, including advising as to whether and when you should challenge your property values and formulating a strategy to give you the best possible chance of success. We’d love to work with you.

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