In a putative class action alleging failure to timely record satisfactions of mortgages, the Supreme Court of Ohio recently held that a cease-and-desist order issued by the Federal Housing Finance Agency (FHFA) to Federal National Mortgage Association (Fannie Mae) did not preclude the trial court from exercising jurisdiction under the federal statute governing judicial review of FHFA orders.

However, the Court also held that a different federal law bars the trial court from ordering Fannie Mae to provide monetary relief under the Ohio statute at issue, while Fannie Mae is under FHFA’s conservatorship, because the federal statute prohibits Fannie Mae from incurring liabilities “in the nature of penalties or fines” while under FHFA conservatorship.

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

The plaintiff mortgagor filed a putative class action alleging that Fannie Mae supposedly failed to timely record in the appropriate county recorder’s office the satisfaction of her residential mortgage within 90 days after the payoff, as required under Ohio law.  The plaintiff and class members each sought to recover $250 under Ohio Revised Code section 5301.36(C), as well as any other legal remedies or damages that may be available to each putative class member.

The trial court certified a class of all persons who, since May 9, 1997, and thereafter, paid off an Ohio residential mortgage, where Fannie Mae was the mortgagee at the time of the payoff, and a satisfaction was not recorded with any Ohio county recorder within 90 days from the date of the payoff. The Eighth District Court of Appeals affirmed the certification of the class.

During the class-certification proceedings, FHFA placed Fannie Mae under its conservatorship.  Fannie Mae then sought to remove the class action to federal court due to the conservatorship. The federal trial court denied Fannie Mae’s removal petition and remanded the matter to the state court.

Upon remand, FHFA issued a consent order requiring Fannie Mae to cease and desist from violating 12 U.S.C. § 4617(j)(4) by paying any fines or penalties imposed by any state mortgage satisfaction law and paying any amount pursuant to Ohio Revised Code 5301.36 or pursuant to any judgment in connection with the pending lawsuit.

Fannie Mae then moved to dismiss for lack of subject matter jurisdiction alleging the class action would affect the FHFA’s enforcement of the consent order in contravention of 12 U.S.C. § 4635(b), which states that “no court shall have jurisdiction to affect, by injunction or otherwise, the issuance or enforcement of any notice or order under section 4631 [cease-and-desist orders] or to review, modify, suspend, terminate, or set aside any such notice or order.”  Fannie Mae also argued that the consent order expressly prohibits it from paying any judgment in the matter.

The trial court dismissed the complaint for lack of subject matter jurisdiction. The Eighth District Court of Appeals reversed and held that the FHFA consent order did not divest the trial court of jurisdiction, and a judgment awarding statutory damages would not affect the FHFA consent order in contravention of 12 U.S.C. § 4635(b).  The Eighth District also concluded that O.R.C. 5301.36(C) does not implicate the federal statute which immunizes Fannie Mae from incurring liabilities in the nature of a penalty and a fine, 12 U.S.C. § 4617(j)(4).

The Supreme Court of Ohio accepted Fannie Mae’s appeal.

The Supreme Court of Ohio began its analysis by determining if the trial court had subject matter jurisdiction under 12 U.S.C. § 4635(b). Subsection 4635(b) states: “no court shall have jurisdiction to affect, by injunction or otherwise, the issuance or enforcement of any notice or order under section 4631 or to review, modify, suspend, terminate, or set aside any such notice or order.” This language mirrors the language in another section of the statute in which the United States Supreme Court concluded provides clear and convincing evidence that Congress intended to deny the district court’s jurisdiction to review and enjoin an agency’s ongoing administrative proceedings.

The Court noted that the jurisdictional bar is not meant to displace a non-party’s right to present its claims to a court, or displace the jurisdiction of the court to hear those claims.  The Supreme Court of Ohio noted that 12 U.S.C. § 4635(b) allows a court to adjudicate state law claims against a regulated entity subject to a federal consent order so long as the exercise of such jurisdiction does not conflict with or contradict the terms of the consent order itself.

The Supreme Court of Ohio found that the FHFA consent order against Fannie Mae did not divest the trial court of jurisdiction. The Court noted that the terms of the consent order narrowly prohibited Fannie Mae from paying any amount pursuant to O.R.C. 5301.36 or pursuant to any judgment in connection with the pending lawsuit, and that the consent order did not preclude the trial court from issuing a judgment or determining that Fannie Mae violated state law.

Therefore, the Supreme Court of Ohio concluded that the FHFA consent order and 12 U.S.C. § 4635(b) do not bar the trial court from adjudicating the plaintiff’s class action claims under O.R.C. 5301.36.

The Court then looked at the applicability of 12 U.S.C. § 4617(j)(4) to damages paid under the Ohio Revised Code. Subsection 4617(j)(4) states that while FHFA is acting as conservator, “the Agency shall not be liable for any amounts in the nature of penalties or fines, including those arising from the failure of any person to pay any real property, personal property, probate, or recording tax or any recording or filing fees when due.” The Court noted that the FHFA succeeds to all the rights, titles, powers, and privileges of a regulated entity during conservatorship, and thus many courts have uniformly construed this section to preclude imposition of fees or penalties while under FHFA conservatorship.

The Supreme Court of Ohio determined that the question of whether Congress intended to waive Fannie Mae’s immunity from state-law penalties implicates strong federal questions, and therefore turned to federal law to determine whether the $250 recovery from the plaintiff and class members constituted a penalty.

The Court noted that the federal test for determining whether a particular statutory provision is punitive or remedial consists of three factors: (1) whether the purpose of the statute as a whole primarily redresses individual wrongs or more general wrongs to the public; (2) whether recovery under the statute runs to the harmed individual or to the public; and (3) whether the recovery authorized by the statute is wholly disproportionate to the harm suffered.

In applying the above factors, the Supreme Court of Ohio concluded that the $250 award under O.R.C. 5301.36(C) for failure to record a mortgage satisfaction would be in the nature of penalties and therefore may not be assessed against the defendant while under FHFA’s conservatorship.

The Court noted that the O.R.C. section is intended to promote efficiency and certainty in real estate transactions, and to penalize the untimely recording of satisfied mortgages. The Court also noted that the recovery of $250 is not tied to any actual losses suffered by an aggrieved individual and is an arbitrary figure.  The Court recited the general rules that damages are commensurate with the injury received, whereas penalties have no reference to the actual loss sustained by the individual who sued for recovery. Accordingly, the Court held, where statutory damages are allowed in addition to compensatory damages, as in this case, they are considered a penalty.

The Supreme Court of Ohio concluded that the $250 award under R.C. 5301.36(C) would be in the nature of a penalty without overruling or contradicting Rosette v. Countrywide Home Loans, 105 Ohio St.3d 296, 2005-Ohio-1736, 825 N.E.2d 599.

In Rosette, the Supreme Court of Ohio concluded that O.R.C. 5301.36(C) is a remedial rather than penal statute and therefore applied the six-year limitations period in R.C. 2305.07 for “a liability created by statute other than a forfeiture or penalty.” The Court noted that the word “damages” in the O.R.C. was dispositive of the court’s ruling in Rosette.  The Court distinguished Rosette because it addressed whether payments under O.R.C. 5301.36(C) should be labeled as penal or remedial for statute-of-limitations purposes.  Accordingly, the Court held, Rosette has no bearing on whether payments under O.R.C. 5301.36(C) are “in the nature of penalties” under 12 U.S.C. § 4617(j)(4), which requires a completely different test under federal law.

The Supreme Court of Ohio concluded that, because statutory sanctions can serve more than one purpose, the statutory remedy in O.R.C. 5301.36(C) vindicates both punitive and remedial purposes without disturbing the holding in Rosette.

The Supreme Court did not address the plaintiff’s due process claim as the Eighth District explicitly declined to address it.

One justice concurred in judgment only stating the court of appeals’ judgment should be affirmed in its entirety, not just technically.  One justice dissented asserting that the trial court was correct in dismissing the case for lack of jurisdiction.