Recently, Porter Wright's Construction Practice team shared a Construction Law Bulletin detailing the Top 5 Ohio Construction Cases of 2012. The year produced several major construction law cases that informed financial institutions must consider in doing business with participants in the industry when Ohio law applies to the relationships. Read our Top 5 Ohio Construction Cases of 2012
The Securities and Exchange Commission and the Commodity Futures Trading Commission have adopted rules that require most broker-dealers, mutual funds, investment advisers, and certain other regulated entities to create programs to prevent identity theft. The new rules become effective May 20, 2013, and entities regulated by the new rules must comply by November 20, 2013.
Regulated entities subject to the rules must develop identity theft prevention programs to detect “red flags” signaling potential identity theft, to respond appropriately to such red flags, and to periodically update detection programs as identity theft risks change.
Among other requirements, the Red Flag Rules apply to “financial institutions” that offer or maintain “covered accounts.” “Covered accounts” are defined broadly to include personal accounts designed to permit multiple transactions and any account with a reasonably foreseeable risk of identity theft to customers. “Financial institutions” include any entity that holds a transaction account belonging to a consumer on which the account holder can make withdrawals to pay third parties. Examples cited by the SEC include:
- a broker-dealer that offers custodial accounts;
- a registered investment company that enables investors to make wire transfers to other parties or that offers check-writing privileges; and
- an investment adviser that directly or indirectly holds transaction accounts and that is permitted to direct payments or transfers out of those accounts to third parties.
Many of these entities likely have identity theft prevention programs because they were previously required by Federal Trade Commission rules; however some entities, such as investment advisers, may have avoided scrutiny of their programs due to lax enforcement and may face increased attention now that the SEC and CFTC are charged with enforcing the Red Flag Rules for these entities.
Regulated entities should evaluate current red flag programs in the context of the SEC’s and CFTC’s new enforcement duties to determine if improvements are needed.
Ohio's 10th Appellate District Finds Debtor Lacks Standing to Challenge Assignee's Power to Enforce Loan Documents
In a decision that will hearten commercial lawyers, on April 23, 2013, Ohio's Court of Appeals for the Tenth Appellate District relied on lack of standing to reject a mortgagor's attempt to avoid the consequences of his undisputed payment default by accusing the mortgagee, which was the assignee of his note mortgage, of lacking standing and using robo-signers. See Deutsch Bank National Trust Company, as Trustee for Argent Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2006-M1 c/o American Home Mortgaging Servicing, Inc. v. John Whiteman, 10th Dist. No. 12 AP-536, 2013-Ohio-1636. In so doing, the court followed other Ohio state and federal courts in holding that a debtor/ mortgagor lacks standing to challenge the validity of assignments from the original creditor/ mortgagee.
Plaintiff Deutsch Bank National Trust Company, as Trustee for Argent Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2006-M1 c/o American Home Mortgaging Servicing, Inc. (the "Bank") was the assignee of a note and mortgage from John Whiteman ("Whiteman") to Argent Mortgage Company, LLC ("Argent"). Five years after the note and mortgage were assigned to the Bank, Whiteman defaulted in payment on the note securing the mortgage and the Bank filed a foreclosure action against him.Continue Reading...
At the end of April, the Ohio Supreme Court agreed to hear three notable cases that readers of this blog may wish to monitor – or perhaps even participate in as amici curiae. First, the Court has agreed to resolve a conflict among Ohio’s appellate districts regarding whether the Statute of Frauds precludes a foreclosure defendant from asserting an oral forbearance agreement as a defense. Next, the Court has agreed to answer a question certified from federal court as to whether Ohio recognizes the tort of “wrongful attempted foreclosure.” Third, the Court has agreed to hear a payday-lending case that has attracted media attention, concerning the interplay between Ohio’s Mortgage Lending Act and the more recent Short-Term Lender Law. For additional information about these three cases, read more here.Continue Reading...
Our colleagues at the Employee Benefits Law Report recently posted an overview of the April 16 U.S. Supreme Court decision in U.S. Airways, Inc. v. McCutchen. The decision will be of interest to bankers and other financial executives because it provides a basis for the control of health care plan costs, and premiums, at a critical time when plans are gearing up for 2014 health care reform cost increases. Read more
In this post, we share a few thoughts about recent developments and trends regarding nonqualified deferred compensation incentives for key bank employees. Banks are seeking ways to attract and retain talent, while ensuring that compensation arrangements are aligned with newer statutory guidance, such as the Dodd-Frank Act and Section 409A of the Internal Revenue Code (the “Code”).
Code Section 409A added new rules for “nonqualified deferred compensation.” Even if an executive compensation arrangement such as an employment agreement, severance agreement, change in control agreement, or equity compensation plan does not provide “nonqualified deferred compensation,” the arrangement may be required to follow strict deferral election and payment timing rules under Section 409A.
Executives are at risk of early income inclusion, a 20% penalty tax, and interest charges if their compensation arrangements violate the evolving 409A guidance. So the first question is whether the IRS is enforcing the potentially harsh penalties, even as to parties who have made a good faith compliance effort while guidance has evolved. In a word, yes.Continue Reading...
As Ohio enjoys its latest boom in oil and gas exploration, it is important to understand how oil and gas leases are treated in bankruptcy. The importance of these issues are underscored by the frequency with which the courts confront them; hence we visit again this unsettled area and consider further the question of the ownership of unextracted oil and gas in a bankruptcy context.
In the recent case of In re Cassetto, 475 B.R. 874 (Bankr. N.D. Ohio 2012), a bankruptcy court for the Northern District of Ohio examined whether a bankruptcy trustee charged with administering the assets of an individual chapter 7 debtor could enter into an oil and gas lease despite the debtor’s objections, and, if so, whether the debtor’s homestead exemption would apply to the signing bonus for such lease.
The lease the trustee sought to enter into had a five year term and would permit the extraction of oil and gas in exchange for a $3,900 per acre signing bonus and royalties of 17.5% of the value of any oil and gas produced from the property. The trustee sought to enter into the lease, receive the signing bonus and thereafter abandon the lease to the debtor such that the debtor would be entitled to any royalty payments under the lease.Continue Reading...
We hope you enjoyed the four-part series on energy financing that has run in the Banking & Finance Law Report blog during the past few weeks. We've compiled those articles into a resource that's relevant to anyone involved with lending or borrowing in the energy sector. Be sure to download the Energy Financing eBook, and feel free to forward it to colleagues who also will be interested.
10th District Court of Appeals Upholds Subordination and Flow Down Provisions in Commercial Construction Documents
On March 29, 2013, the Court of Appeals for the 10th Appellate District in Columbus issued a decision of significance for mortgage lenders that rely on contractual subordination and flow down provisions in construction contracts.
In KeyBank Natl. Assn. v. Southwest Greens of Ohio, L.L.C., 10th Dist. No. 11AP-920, 2013-Ohio-1243, the 10th District Court of Appeals upheld the September 14, 2011 decision by Judge John Bessey of the Franklin County, Ohio Common Pleas Court that the plaintiff lenders (the "Lenders") had priority over the subcontractors/ mechanic's lien claimants even though the lenders recorded their mortgage subsequent to the notice of commencement's recording. The decision is significant because during this period fraught with contested foreclosures and inter-creditor disputes over priorities in real estate, the 10th District has affirmed Ohio's broad construction and consistent enforcement of flow down provisions in construction documents.
In the spring of 2008, defendant Columbus Campus, LLC ("Campus") contracted with a general contractor to construct a continuing care retirement community on 88 acres in Hilliard, Ohio. On March 10, 2008, Campus filed a notice of commencement; on April 16, 2008, the Lenders executed a $90 million construction loan agreement with Campus secured by a mortgage on the 88-acre property; the Lenders recorded their mortgage on April 22, 2008. By March, 2009, the Lenders had disbursed approximately $45 million of the loan proceeds pursuant to various draw requests, $27 million of which was paid to the general contractor and various subcontractors.Continue Reading...
Although Ohio lenders that finance companies in the oil and gas industry will encounter some of the same due diligence issues found in other industries, the oil and gas business is a world of its own. We advise our lending clients to conduct diligence in the oil and gas industry in the same manner as if they were buying the company, perhaps just not to the same degree, because lenders typically have some collateral to help them recover a portion of their investments from oil and gas customers that stumble. Nevertheless, lenders need to understand the world of oil and gas if they wish to avoid mistakes and prosper.
First, lenders must understand that the shale oil and gas revolution has inspired a new generation of entrepreneurs, some of whom are making their first foray into the oil patch. This entry will be difficult for companies with little or no experience or existing relationships. Even well-established oil and gas companies may know very little about the laws, regulations, and geology of Ohio. To properly evaluate risk, the lender's first task is to learn about its prospective borrower. Does the prospective borrower have experience in the industry, with this particular play, in this state, or with a given technology, such as drilling horizontal wells? Do they understand the regulations applicable to their businesses? These are just a few of the critical questions lenders should ask.Continue Reading...
With the recent boom in Ohio’s oil and gas industry, secured creditors in Ohio should be sensitive to special statutory requirements for perfecting security interests granted in assets of gas and pipeline companies.
Although security interests in personal property and fixtures are most frequently perfected by filing financing statements under the UCC, there are several types of security interests which require perfection through other channels. In Ohio, pursuant to Section 1701.66 of the Revised Code, security interests in property of “public utilities” are among the interests that must be perfected by other means. “Public utility” is defined by the Ohio Revised Code Sections 4905.02 and 4905.03 to include, among others and with certain exceptions, (i) gas companies and natural gas companies, when engaged in the business of supplying artificial or natural gas, as applicable, for lighting, power, or heating purposes to consumers within Ohio and (ii) pipe-line companies, “when engaged in the business of transporting natural gas, oil or coal or its derivatives through pipes or tubing, either wholly or partly within [Ohio], but not when engaged in the business of the transport associated with gathering lines, raw natural gas liquids, or finished product natural gas liquids.” (Emphasis added). Additional discussion about this distinction among pipeline companies follows.Continue Reading...
By now, you have probably heard about some of the changes in title policies and title searches caused by the recent oil and gas activity in Ohio. Title insurers also recently added to their policies a standard exception for any “lease, grant, exception or reservation of minerals or mineral rights.”
Essentially, this language means that any separate mineral interest created at any point in time by any party is now an exception to the title insurance policy, regardless of whether it is expressly disclosed. In other words, there will be no coverage offered whatsoever if one of those interests negatively impacts the property in the future, even if it was not specifically disclosed in the policy. And because title insurers will not insure against oil and gas interests, there isn't much incentive for them to include such interests as exceptions in their title searches, especially when the cost of obtaining such information can be staggering.Continue Reading...
As Ohio enjoys its latest boom in oil and gas exploration, it is important to understand how oil and gas leases are treated in bankruptcy. Unsettled Ohio law regarding whether a debtor owns unextracted oil and gas as part of the debtor's real property can make this a difficult issue.
In In re Loveday, No. 10-64110, 2012 WL 1565479 (Bankr. N.D. Ohio May 2, 2012), the Northern District of Ohio examined whether a Chapter 13 debtor had properly included in his bankruptcy schedules his interest in unextracted oil and gas relating to the debtor’s real property. Whether the debtor’s oil and gas rights were properly scheduled was a significant factor in determining whether the debtor could retain the proceeds of the sale of his oil and gas rights. But more importantly, for the companies who sought to purchase the debtor's oil and gas rights, knowing whether such rights were properly scheduled was necessary to determine whether the debtor had unfettered authority to sell his oil and gas rights without court approval.Continue Reading...
With significant changes to law governing how the U.S. grants patents taking effect next month, Porter Wright recommends that all clients consider filing any contemplated patent applications by March 15. This includes filing non-provisional patent applications, and in some cases Patent Cooperation Treaty (PCT) patent applications, that are based upon any provisional or non-U.S. patent application filed since March 2012. Though there are some exceptions to this advice, waiting until after March 15 may be problematic.
In brief: For patent applications having any claim with an effective filing date after March 15, it will no longer be possible to overcome prior art by showing an earlier date of invention. Thus, the prior art for purposes of patentability will include: 1) third-party public disclosures of any kind, anywhere in the world, prior to your effective filing date; and 2) issued U.S. patents and published U.S. or PCT patent applications that were effectively filed before your effective filing date. In addition to not being able to "swear behind" a prior art reference by proving an earlier date of invention, the prior art date for patents and published patent applications may be as much as 18 months earlier than under current law because of foreign priority claims.
It is also important to note that inventors will not lose the benefit of any earlier provisional or non-U.S. patent application should they wait until after March 15 to file. Any claims that are adequately supported in the earlier filing will be entitled to that earlier filing date for purposes of patentability. However, if even one claim in the post-March 15 application is new (i.e., includes subject matter not disclosed in your earlier application) the new first-to-file rules will apply to all claims — and there will be no way to alter this scenario through actions such as deleting claims containing the new subject matter.
A Porter Wright Law Alert describes these patent law changes in greater detail.
Ohio Passes Legislation Preventing Recovery on "Cherryland" Insolvency Carveouts in Nonrecourse Loans, Among Other Changes
Bankers and their counsel should note that during its December lame-duck session, the Ohio General Assembly passed the Ohio Legacy Trust Act (Am. Sub. H.B. 479), which will go into effect March 27, 2013. The Act creates borrower-friendly provisions prohibiting the use of so-called “Cherryland” insolvency carve-outs in nonrecourse loan documents which will be of interest to all financial institutions engaged in commercial lending in Ohio.
“Cherryland” insolvency carve-outs are so named for the 2011 Michigan appellate case, Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership, in which the court upheld a widely-used provision in non-recourse loan documents that caused the loan at issue to become fully recourse to the guarantor upon the insolvency of the borrower.
The Cherryland Mall decision prompted the Michigan legislature to pass the Nonrecourse Mortgage Loan Act, which became effective in Michigan in March of 2012. In order to legislatively overturn the Cherryland Mall decision, the Nonrecourse Mortgage Loan Act provides that a post-closing solvency covenant cannot be used as a nonrecourse carve-out or as the basis for any claim or action against a borrower or guarantor on a nonrecourse loan. It also provides that any provision purporting to create such a carveout is invalid and unenforceable.
"Post-closing solvency covenant" is defined in both Michigan’s Nonrecourse Mortgage Loan Act and the Ohio Legacy Trust Act to mean "any provision of the loan documents for a nonrecourse loan, whether expressed as a covenant, representation, warranty, or default, that relates solely to the solvency of the borrower, including, without limitation, a provision requiring that the borrower maintain adequate capital or have the ability to pay its debts, with respect to any period of time after the date the loan is initially funded." The definition does not include a covenant not to file a voluntary bankruptcy or other voluntary insolvency proceeding or not to collude in an involuntary proceeding, so provisions of this sort should continue to be included where appropriate in nonrecourse loan documents.
Ohio law had not explicitly addressed the issue raised in Cherryland until the passage of the Ohio Legacy Trust Act. The Act contains language substantively identical to that of the Michigan Nonrecourse Mortgage Loan Act. The Act will add Sections 1319.07, 1319.08, and 1319.09 to the Ohio Revised Code. When effective (which is itself a matter of some complexity as described below), these sections will prohibit the use of post-closing solvency covenants as nonrecourse carveouts in a nonrecourse loan and will make any provision purporting to create such a carveout invalid and unenforceable. The Ohio General Assembly stated that the use of a post-closing solvency covenant as a carveout to a nonrecourse loan is inconsistent with the nature of a nonrecourse loan and is "an unfair and deceptive business practice and against public policy."
Lenders using nonrecourse loans should consult legal counsel about how this new statute will affect their loans. In addition to the Cherryland Mall provisions, the Act contains a number of unrelated provisions: establishing “legacy trusts” in Ohio, increasing the personal residence exemption from execution, garnishment, attachment, or sale to satisfy a judgment from $20,200 to $125,000, effectively eliminating the rule against perpetuities in certain trusts, and changing various other trust-related provisions of Ohio law.