What’s on their Minds: Does the Punitive Damage Cap Apply to a Punitive Damage Award Arising from a Violation of the Landlord-Tenant Statute? Sivit v. Village Green of Beachwood.

Update: On April 2, 2015, the Supreme Court of Ohio handed down a merit decision in this case.  Read the analysis here.

On March 11, 2014, the Supreme Court of Ohio heard oral argument in Carlos Sivit, et al., v. Village Green of Beachwood, L.P., et al, 2013-0586. At issue in this case is whether a landlord can be held liable for faulty wiring in a concealed area and, if so, whether the punitive damage cap applies to any punitive damage award.

Case Background

Defendant-appellant Village Green of Beachwood was the owner-developer of the Village Green Apartments, an eleven-building apartment complex located in Beachwood, Ohio, built in the late 1980’s. Beginning in September of 2006, the property was managed by defendant-appellant Forest City Residential Management, Inc. For simplicity, both together shall be referred to as the Landlords.

Over the years, many maintenance issues arose in this complex. In 2004, a fire broke out in Building Three of the apartment complex. Following an investigation, it was determined that this fire originated in the interstitial space between floors and was due to an electrical fault.

In 2007, another fire occurred in the complex, which engulfed Building Eight.  After an investigation, it was determined that this fire, like the 2004 fire, occurred in the interstitial space between floors. Further, it was determined that the fire ignited due to an electrical fault that was likely caused by a misplaced staple in the wiring. Prior to this fire, tenants complained of the same types of electrical issues and water problems that occurred before the 2004 fire.

In a consolidated case, a number of tenants of Building Eight filed suit alleging negligent construction and negligent maintenance in violation of the Ohio Landlord-Tenant Act. At trial, the jury found for the tenants and awarded $597,326 in compensatory damages (against both defendants on the negligent maintenance claim, and against Village Green on the negligent construction claim) and, subsequently, in a bifurcated trial, $2,000,000 in punitive damages against Village Green only.  In addition, the trial judge awarded $1,040,000 to the tenants for attorney’s fees.

On appeal, the Eighth District Court of Appeals unanimously affirmed. The appeals court held that the punitive damages cap did not apply because the damages arose from the breach of the rental agreement, not from a tort action, and the provisions of the Ohio Landlord Tenant Act violated by the Landlords should be deemed to constitute implied terms of the parties’ rental agreement. Read the oral argument preview of the case here.

At Oral Argument 

Landlords’ Argument

The court of appeals reasoning in this case is totally circular and erroneous. This case cannot simultaneously be a breach of contract case to avoid the punitive damages cap and a tort case to receive punitive damages. This Court has made it abundantly clear, as recently as last month in Mann v. Northgate Investors, L.L.C., Slip Opinion No. 2014-Ohio-455, that a breach of the obligations arising under R.C. 5321.04 constitutes negligence per se.

The court of appeals held that the obligations imposed by the statute are implied provisions of the rental agreement between the parties. If that is correct, then there can be no punitive damages in this case at all.  As this court has held for over  a hundred years, there can be no punitive damages in a breach of contract action.  In this case there wasn’t a single word in the jury instructions about any contract breach. It was all negligence.  So, since this is a tort claim, the punitive damages cap must be applied to the verdict against Village Green. (Punitive damages were not awarded against the management company.)

But it is also the Landlords’ position that no compensatory damages should be awarded in this case at all; thus the issue about the punitive damages will fall away, as will attorney fees. To get punitive damages a plaintiff must show actual malice, which in this case means showing the landlords had actual or constructive knowledge of the dangerous condition, and failed to do anything to remedy the problem.  Here, that simply cannot be proven; the problem was in an interstitial space, totally hidden from view.

Tenants’ Argument

The Tenants’ attorney sharply disagreed with the Landlords’ characterization of the record, arguing that it will show endless and ongoing problems with the building that burned down.  Four different sets of inspectors  characterized the apartment  complex as one of shoddy and negligent workmanship, and lack of maintenance.

While it is true that the language of R.C. 5321.04(A) is specific enough to impose negligence per se, the definition of “tort action” in R.C. 2315.21(A)(1) specifically excludes damages for breach of contract or another agreement between persons. Landlord tenant cases were never intended to be made part of tort reform. The legislature did not intend for contracts or agreements between persons to be capped. There is no cap for a tort based on a contractual relationship.

What Was on Their Minds

Is this a Tort Claim or is this a Contract Claim?

Most of the time at argument was spent trying to determine exactly what the Tenants were arguing on this point.

The Landlords’ lawyer was totally clear.  He conceded at the outset that this was a tort claim, pure and simple, that tort damages are capped, and that punitive damages are not recoverable in breach of contract claims. That has been the common law forever. He did of course disagree that any damages at all should have been awarded on the tort claim.

The Tenants’ lawyer was not so clear, but doggedly insisted that the language in the punitive damage caps statute somehow exempted this kind of tort from the caps.

Justice French really cut to the heart of the matter with this key set of remarks directed to the tenants’ lawyer:

“Rather than a hybrid, which is a melding of the two into one, isn’t it really two separate actions with different remedies arising from the same facts? If we were to call this a contract action, why would punitive damages be appropriate? Punitive are proper here because they arise from the tort claim in this case? I’m surprised that is not what you are arguing . We can look at the punitives and attach them only to the tort claim.  But instead what I hear you saying is for the purposes of the caps this is a contract action, but for the purposes of punitive damages this is a tort.  That is what I am hearing.”

That seemed to be what everyone was hearing (including me.) The Tenants’ lawyer stayed on message, which was that when a tort arises from an agreement between the parties, it isn’t capped, and that is what the legislature intended.  When Justice O’Donnell asked whether this was a tort or a contract, the Tenants’ lawyer answered that it was a tort claim that originated out of a rental agreement.

Justice French asked again, why the tenants should get punitive damages at all if the court were to construe this as a contract case? After an unfocused answer to this question, in an irritated tone, Justice O’Donnell said this:

“What we are trying to figure out is the nature of the claim and the application of the punitive damage statute. Could you confine your response to that? You keep saying it is negligence per se, which is a tort, right (answer: yes). So what is the implication, then, that it is a tort?  In regard then to punitive damages, are they not limited to twice the compensatory damages?”

Answer: “not on a tort that is based on a contractual relationship.”

Justice Pfeifer tried again, asking if this were a contract action, wouldn’t a fair reading be there should be no punitive damages at all?  Counsel for the tenant continued to hang his hat on the statutory language, “unless it is a contract or an agreement between the parties.”

Ok, on to other points.

The Cap on Punitive Damages

Does it matter that there are two defendants, and that both were found liable for the compensatory damages, but only one (Village Green) for the punitive damages, asked Justice French? (answer from the landlord: no)

Should torts that arise from statutory duties be treated differently when it comes to the punitive damages cap, asked Justice Lanzinger?

The Condition of these Properties

 Wasn’t there testimony about water problems and calls made-about issues in the area where the fire later occurred, asked Justice Pfeifer?

Hadn’t one of the buildings burned earlier? Was there an origin determination on that fire, asked Justice O’Donnell?

Wasn’t there a finding by the trial court and the appeals court that Building 8 was negligently constructed, asked Justice O’Neill?

The Question of Notice

For there to be notice, must the landlord have actual knowledge of the exact literal cause of the fire, asked Justice Lanzinger? (answer: no, but there must have been knowledge that something was wrong in the interstitial space where the fire occurred.) Can there be actual malice without that actual knowledge? Did the record show actual knowledge of the problem in the area where the fire started? How far in advance of the fire?

The Attorney Fees

What happens to the attorney fee award if the punitive damages are capped, asked Justice Pfeifer? Or if there are none?

How it Looks from the Bleachers

To Professor Bettman

I think the court of appeals went off the rails on this one.  Yes, there are hybrid tort/contract actions, like insurance bad faith claims and wrongful discharge in violation of public policy claims.  But those are torts that emerged from the intersection of tort and contract law.  The claim in this case is clearly a tort claim.

The tenants’ argument was ironic to me.  Until the Landlord Tenant law was enacted in 1974, tenants had very few remedies from landlords out of possession and control.  And even after its enactment, in Thrash v. Hill , the tenants struggled mightily to convince the Court that a breach of the statutory duty to keep the premises in good repair and habitable condition was  a tort—a position totally rejected by the Court in that case.  In Thrash,  the Court held that a lease is a contract, all the statutory remedies were contractual and exclusive, and that there were no tort remedies in that statute.  Then, one election cycle later, in Shroades v. Rental Homes, which Justice Pfeifer mentioned at oral argument, the Court held that a landlord’s breach of the duties imposed by R.C. 5321.04 created tort liability, and that a violation of this provision constituted negligence per se.  So to hear the Tenants’ lawyer talk about contract remedies again suggested George Santayana’s great adage that those who cannot remember the past are condemned to repeat it.

I’m calling this as a unanimous decision that this is a tort claim, subject to the punitive damage cap. The Tenants’ lawyer seemed to be exasperating everyone with trying to have the best of both worlds here—part tort, to get punitive damages, part contract to avoid the cap.  It will be interesting to see how the court handles the language in the cap statute excluding damages for breach of contract or “another agreement between persons.”  The Landlords’ lawyer provided an interesting answer to that.  He suggested that the legislature wanted to be sure no one thought the legislative intent was to change the common law rule against barring punitive damages in a breach of contract action.

I also think the Court will reject the Landlords’ argument that no compensatory damages should have been awarded because they had no notice of the problems which led to the fire.  I think the Landlords in the case took too cramped a view of what constituted notice, and downplayed the problems at the complex.  Justice O’Neill appeared particularly put out at the Landlords’ view of the state of the premises.

To Student Contributor Cameron Downer

Looks like a partial win for the Landlords; the punitive damages will be capped.

Overall, the justices’ questions showed that they were leaning toward finding a statutory Landlord Tenant violation to be a tort that is subject to the punitive damage cap. The Tenants’ lawyer confused the justices by his explanation of how a violation of the statute is a tort for the purposes of allowing punitive damages, but a contract claim for the purposes of avoiding the punitive damage cap. Justice Pfeifer, not long after he shared his distaste for the punitive damage cap, tried to give an example that would help demonstrate the Tenants’ argument, however, it did not seem to sway the other Justices.

In addition, the lawyer for the Landlords tried to argue that they could not be held liable for compensatory damages because the Landlords had not been put on notice of the exact condition that caused the fire, i.e. the specific misplaced staple in between the ceiling of one apartment and the floor of another. The justices did not seem to buy the argument, especially Justice O’Neill who asked the Landlords’ counsel whether they were looking at the same record and case. In all, the Court will likely find that the violation constituted a tort in which the punitive damage cap applies.

 

 

 

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