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‘Home Rule’ City May Not Adopt Predatory Lending Ordinance That Bans Practices Allowed by State Law

2005-0160 and 2005-0161. Am. Financial Servs. Assn. v. Cleveland, 2006-Ohio-6043.
Cuyahoga App. No. 83676, 159 Ohio App.3d 489, 2004-Ohio-6416. Judgment reversed.
Moyer, C.J., Lundberg Stratton, O'Donnell and Lanzinger, JJ., concur.
O'Connor, J., concurs in judgment only.
Resnick and Pfeifer, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2006/2006-Ohio-6043.pdf

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(Nov. 20, 2006) In a 5-2 decision announced today, the Supreme Court of Ohio held that three Cleveland city ordinances violated the “home rule” provision of the Ohio Constitution because: (1) state statutes setting regulatory guidelines for Ohio residential mortgage lenders are “general laws” that prescribe a uniform statewide regulatory scheme; and (2) provisions of the Cleveland ordinances conflict with state law by prohibiting lending practices within the city that are implicitly permitted under the state statute.

Today's majority opinion, written by Justice Terrence O'Donnell, invalidated the Cleveland ordinances on the basis that they imposed regulations on local residential mortgage lenders that were more restrictive than statewide regulations enacted by the Ohio General Assembly.

Adopted in 1912, Article XVIII of the Ohio Constitution sets forth the powers exercised by municipal corporations within the state. It is widely referred to as the “home rule” amendment. Section 3 of Article XVIII states that: “Municipalities shall have authority to exercise all powers of local self-government and to adopt and enforce within their limits such local police, sanitary and other similar regulations, as are not in conflict with general laws.”

This case involved three local ordinances adopted by the City of Cleveland in 2002 that prohibited various “predatory” practices by consumer lending institutions doing business in the city. Shortly after they were adopted, the Cleveland ordinances were challenged in a court action initiated by the American Financial Services Association (AFSA), a national trade organization representing consumer lending institutions. AFSA asserted that the Cleveland ordinances were in conflict with legislation enacted earlier in 2002 by the Ohio General Assembly, Sub. H.B. 386, which established regulatory guidelines applicable to all residential mortgage lenders doing business in Ohio. One provision in the bill, codified as R.C. 1.63, stated the legislature's intent to “preempt” the entire field of mortgage lending regulation for the state and included language barring local governments anywhere in Ohio from enacting local mortgage lending regulations.

The Cuyahoga County Court of Common Pleas granted summary judgment barring enforcement of the Cleveland ordinances. The city appealed and the 8th District Court of Appeals reversed the trial court's judgment, holding that R.C. 1.63 was not a “general law” because it did not contain any regulatory provisions but operated solely to bar local regulations. The court of appeals also ruled that specific provisions of the Cleveland ordinance the trial court had identified as conflicting with state regulations were not in conflict because the city guidelines did not prohibit any practices that were explicitly permitted in the language of the state regulations. The 8th District certified that its decision was in conflict with a 2004 ruling of the 2nd District in a very similar case, Dayton v. State, and the Supreme Court agreed to hear arguments in the case to resolve the conflict between appellate districts.

In today's decision the Supreme Court reversed the 8th District, affirming the reasoning of the 2nd District in Dayton and holding that the Cleveland ordinances are unenforceable under the home rule amendment.

Writing for the majority, Justice O'Donnell cited a four-part test established in the Supreme Court's 2002 decision in Canton v. State for determining whether a legislative enactment qualifies as a “general law.” Quoting from that decision, Justice O'Donnell wrote that a general statute “must (1) be part of a statewide and comprehensive legislative enactment, (2) apply to all parts of the state alike and operate uniformly throughout the state, (3) set forth police, sanitary, or similar regulations, rather than purport only to grant or limit legislative power of a municipal corporation to set forth police, sanitary, or similar regulations, and (4) prescribe a rule of conduct upon citizens generally.”

Analyzing the package of state mortgage lending regulations enacted by the legislature as Sub. H.B. 386, Justice O'Donnell wrote that, considered as a whole, the legislation met all four of the Canton criteria and therefore qualified as a general law with which a home-rule city ordinance may not conflict.

In determining whether the Cleveland lending ordinances conflicted with the state's regulatory scheme, Justice O'Donnell pointed to prior Supreme Court decisions in which the Court has held that local ordinances conflict with state laws when they “permit what the state prohibits, or prohibit what the state permits.”

Citing decisions that have struck down local ordinances imposing speed limits that were lower than permitted by state law, earlier local closing times for liquor sales than were permitted by state liquor regulations and lower local caps on bingo parlor prizes than were permitted by state charitable gaming laws, Justice O'Donnell concluded that “any local ordinances that seek to prohibit conduct that the state has authorized are in conflict with the state statutes and are therefore unconstitutional.”

“In this case,” wrote Justice O'Donnell, “the Cleveland ordinance purports to regulate loans with interest rates three and a half percentage points below those that the state regulates. … In addition to a lower threshold for regulation, the municipal ordinance imposes stricter standards and additional requirements on lenders through mandatory loan counseling for the borrower … The ordinance also prohibits any direct payments to home-improvement contractors of the proceeds of any residential loan having an interest rate within the specified ranges, and provides criminal penalties for certain violations of the ordinance, Thus Cleveland has undertaken to regulate the making of a loan authorized by the General Assembly. This is directly contradictory to the syllabus in Struthers v. Sokol because these ordinances seek to forbid what the statutes allow. Accordingly, the loan regulations of the ordinances are unconstitutional.”

Justice O'Donnell's opinion was joined by Chief Justice Thomas J. Moyer and Justices Evelyn Lundberg Stratton and Judith Ann Lanzinger.

Justice Maureen O'Connor concurred in judgment only, and entered a separate opinion indicating her belief that the Court should place more emphasis on the concept of preemption as opposed to the conflict analysis reflected in the majority opinion. Justice O'Connor noted that the federal courts have established clear guidelines for determining when a legislative enactment of Congress has preempted a state or local political unit from attempting to regulate in an area where federal regulation has been established. She suggested that clear judicial recognition by Ohio courts of the state's authority to preempt local regulation in matters of statewide concern, which she found applicable in this case, would reduce litigation over alleged conflicts between state and local regulations and speed the resolution of conflicts that do arise.

Justices Alice Robie Resnick and Paul E. Pfeifer entered separate dissenting opinions. Both rejected the majority's holding that a state statute prohibiting interest rates and loan charges above a certain

percentage as “predatory” should be read as implicitly permitting lending institutions to impose any rate or charge lower than the prohibited state limit.

Justice Resnick challenged the majority's analysis of Ohio case law, asserting that each of the precedents cited in the majority opinion involved state statutes that not only prohibited conduct that exceeded a certain limit, but also included language explicitly allowing conduct below the statutory limit or explicitly barring local regulations that would further restrict activity addressed by that statute.

In this case, Justice Resnick wrote, “along comes the majority with a newly-created ‘conflict by implication test.'” Justice Resnick cited other cases in which Ohio courts have declined to interpret state statutes prohibiting one type of detailed conduct as implicitly permitting similar conduct absent a prohibited detail, and wrote: “(P)ermission to act without consequence under state law is not equatable to permission to act irrespective of municipal regulation. The former may be implied, but the latter … requires some positive grant of authority by the General Assembly. Otherwise, any form of conduct that could have been but was not expressly prohibited by a state law on the subject would automatically exceed the reach of municipal authority, and there would be little left for municipal regulation.”

Justice Pfeifer expressed similar disagreement with the majority finding of an “implied conflict” between the Cleveland ordinances and the predatory lending provisions enacted by the state. He also noted that the first legal issue presented to the Court for judgment did not reference other provisions included in Sub. H.B. 368, but was limited to “whether R.C. 1.63 is a general law.”

Stating that the majority opinion “barely addresses” R.C. 1.63, Justice Pfeifer wrote that the statutory language of that code section fails the third element of the Canton v. State four-part test because it: “does not set forth any regulations; it purports only to prohibit municipalities from asserting their own police powers.” Justice Pfeifer went on to write that “R.C. 1.63 also fails the fourth element of the Canton test, since it does not ‘prescribe a rule of conduct upon citizens generally.' R.C. 1.63 requires nothing of citizens generally. It operates only to proscribe political subdivisions from protecting their own citizens from the rapacious acts of predatory lenders. Certainly no person reading R.C. 1.63 would think that it applied to him or her. Since R.C. 1.63 fails to meet the Canton test, I would hold that it is not a general law.”

John Winship Read, 216.479.6103, for the American Financial Services Association.

Thomas J. Kaiser, 216.664.2800, for the City of Cleveland.

Douglas R. Cole, 614.466.2872, for the Ohio Attorney General.