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Banking & Finance Law Report

Ohio IOLTA and IOTA Provide CRA Consideration

Posted in CRA, Regulation and Compliance

Editor’s Note:

This post was prepared by Susan A. Choe, Deputy Director & General Counsel, The Ohio Legal Assistance Foundation.

Federal bank examiners will now provide positive CRA consideration under the investment test for interest paid above the market rate on Ohio IOLTAs (“interest on lawyer trust accounts”) and IOTAs (“interest on title agent trust accounts”). This development was confirmed by the Cleveland office of the Office of the Comptroller of the Currency and representatives of the Federal Reserve Bank of Cleveland.  Confirmation was sought by the Ohio Legal Assistance Foundation to reinforce support for Ohio’s legal aids during a time of declining revenues and increased demand for legal aid.

Since the mid-1980’s, IOLTAs and IOTAs have been used to fund civil legal aid for Ohioans who cannot afford an attorney. In this way, civil legal aid ensures fairness in the justice system regardless of how much money a person has.

For more information on CRA investment credits related to IOLTA or IOTA accounts, please contact Susan Choe, Esq., Deputy Director and General Counsel for the Ohio Legal Assistance Foundation, by email to schoe@olaf.org.


Law v. Siegel, __ U.S. ___, 134 S.CT. 1188 (2014): The Supreme Court Addresses the Scope of the “All Writs” Provision in the Bankruptcy Code

Posted in Bankruptcy

The Bankruptcy Code has approximately 275 different sections. The number of its subsections and subparagraphs is well into the thousands. It is impossible to select the “most significant” provision in the Bankruptcy Code, but among the candidates for that title is certainly § 105 of the Code.

Section 105(a) of the Bankruptcy Code provides in part that “The court may issue any order, process, or judgment that is necessary to carry out the provisions of this title.” The importance of this “all writs” provision is obvious. It specifically authorizes bankruptcy courts to make the rest of the Bankruptcy Code effective, even if Congress has not specifically included in the other provision of the Code any directive that puts those provisions into motion. When the Bankruptcy Code addresses an issue, § 105 (a) is available to ensure that the issue can be resolved and the solution implemented.

The Supreme Court recently took on the task on determining the limits of the reach of § 105(a) in the case of Law v. Siegel. In Siegel, Stephen Law filed for Chapter 7 bankruptcy in 2004. Among the listed assets in the case was Law’s house in California. Law valued the house at approximately $350,000, and he claimed $75,000 of that amount as exempt under the California homestead exemption. The debtor’s schedules also stated that the house was subject to two mortgages. The first mortgage was identified as being held by Washington Mutual Bank and was in the amount of nearly $150,000. The second mortgage was also in the approximate amount of $150,000 and was listed as being held by “Lin’s Mortgage & Associates.” If these two mortgages were enforceable, they would have rendered the property of no value to the bankruptcy estate and the trustee. Rather, the debtor would likely have retained the property by asserting his homestead exemption and making a new deal with the lenders to reaffirm or otherwise pay their claims. Continue Reading

Risk Management and In-house Bank Lawyers

Posted in Bank Regulation

In-house bank lawyers got a vote of confidence last week. The context was a comment submitted to the Office of the Comptroller of the Currency regarding proposed enforceable guidelines on the risk management practices for the nation’s largest banks. Last January, the OCC proposed the guidelines and asked for comments. Previously, risk management practices suggested by the OCC have been largely precatory.

The proposed guidelines suggest minimum standards for the design and implementation of a risk governance framework. While the proposed guidelines would apply to banking organizations with consolidated assets equal to or greater than $50 billion, once they are effective, they will be influential regarding the risk management practices of smaller banks. The guidelines document (Docket ID OCC-2014-0001) is available here.

The overall goal of the proposal is to help banking institutions in “defining and communicating an acceptable risk appetite across the organization.” The measures should address such things as the capital, earnings, and liquidity that may be at risk on a firm-wide basis, the risk that may be taken in each line of business, and each key risk category monitored by the institution. A bank’s risk management practices should cover the following categories of risk: credit risk, interest rate risk, liquidity risk, price risk, operational risk, compliance risk, strategic risk, and reputation risk.

The proposed guidelines define some organizational units as “fundamental” to the risk management. These units are “front-line units, independent risk management, and internal audit.”

The comment on the role of in-house lawyers came from a comment filed on March 26 by the Banking Committee of the Business Section of the American Bankers Association,  a group populated by in-house lawyers, regulatory agency lawyers and outside counsel for banks, large and small, which suggested that the proposed guidelines fail to recognize the real role of in-house lawyers as an independent “line of defense.” Instead, the proposed guidelines considered the legal function to be one of a number of traditional business units that provide support to front-line business units.

The comment suggested: “The mission of the legal function is to provide independent professional advice to management and the board. It does not ‘provide services’ in the same sense the other front-line units do. Indeed, as the only internal organization that possesses the skills and the license to consider the applicability of laws, regulations and regulatory interpretations to the full spectrum of activities conducted by the bank, the legal function is in reality a fourth line of defense.” The comment goes on to suggest the OCC’s proposal could undermine attorney-client privilege and subject the legal function to oversight by internal audit and independent risk management.

The Banking Committee expressed its own views and not the views of the Business Section and not the views of the ABA. But it is an interesting and useful perspective on the way many banking organizations view their in-house lawyers. The comment period on the OCC’s proposal ended March 28th.


In re McKenzie, 737 f.3d 1034 (6th cir. 2013) Extending the Deadline for Trustees to Attack Preferences: The Sixth Circuit’s Life Jacket for Tardy Trustees

Posted in Bankruptcy, SIxth Circuit

It is often said that the acid test of a security interest or lien on property is the bankruptcy of the property owner. If that person or entity files a bankruptcy petition, the bankruptcy trustee has a number of options to challenge or even avoid certain liens. A lien that is not properly perfected is subject to attack by a trustee under both the “strong-arm clause” (Bankruptcy Code § 544) and the preference provisions (Bankruptcy Code § 547). If the lien is avoided, the property can then be sold and the proceeds distributed to the unsecured creditors. The trustee must act timely, however, if he or she is to be successful in avoiding the lien. The Sixth Circuit Court of Appeals recently addressed the timeliness of a trustee’s actions against the holder of an allegedly unperfected lien on a debtor’s property. Its conclusion raises several important questions regarding the timeliness of trustees’ actions to challenge the propriety of a secured creditor’s claim.

In In re McKenzie, 737 F.3d 1034 (6th Cir. 2013), the debtor granted a security interest in certain of his property to secure his obligation to pay fees to his attorneys. Among the assets pledged as security for the fees was the debtor’s equity interest in a limited liability company. The trustee challenged the creditor’s security interest asserting that the creation of the security interest was a preferential transfer on account of an antecedent debt. The trustee did not issue this challenge, however, until almost three years after the commencement of the bankruptcy case. Under Bankruptcy Code §546(a)(1)(A), the trustee must commence an action to avoid a preferential transfer within two years of the commencement of the case. Nevertheless, the Court of Appeals concluded that the trustee could assert that power in a specific procedural context.

Section 546 provides that any action by a trustee to avoid a preferential transfer under § 547 of the Bankruptcy Code or to exercise the strong arm powers of § 544 must be initiated before two years after the commencement of the case. (The statute extends this limitation if a trustee is first appointed in the case during the second year that the case is pending. In that event, the limitation on these avoiding powers actions allows the trustee to pursue those cases for up to one year after his or her appointment as trustee.) In McKenzie, had the trustee brought an action to recover the alleged preference from the creditor, he would have been met with a motion to dismiss the action as being outside the statute of limitations established by § 546(a). This motion would presumably have succeeded. The matter did not arise in that context. Instead, the creditor brought a motion for relief from the automatic stay apparently so that it could recover its claim out of the collateral that was securing the debt. It brought this motion in May of 2011, well after the § 546(a) time limitation had passed. In response to the motion for relief from the stay, the trustee asserted that the creditor’s security interest was preferential and that under §502(d) of the Code, the creditor’s claim could not be allowed until it had turned over any property that it held as a result of a preferential transfer. It was this position of the trustee that the Court of Appeals found persuasive. Whether the court properly applied the section is subject to question.

Section 502(d) keeps a creditor who is holding property that should be in the bankruptcy estate from sharing in any distribution of estate assets until they have returned the property that they arguably are improperly holding. If they did not return that property, they would receive a greater percentage repayment of their claim than other similarly situated creditors. To illustrate, assume that creditor A is owed $10,000 and has a preferential transfer of a security interest in the debtor’s vehicle that is worth $5,000. If the unsecured creditors in the case would be paid 10% of their claims, Creditor A would get a total of $5,500 on its claim. It would receive the $5,000 from the automobile, and 10% of its remaining $5,000 unsecured claim, for a total of $5,500. This is substantially more than the creditor would receive if Creditor A’s security interest in the vehicle were avoided as a preference and the vehicle sold for the benefit of all of the debtor’s creditors. In that way, §502(d) protects the bankruptcy estate by ensuring that avoided transfers are not ignored in the distribution system. A closer look at the language of § 502(d), however, arguably shows that the Sixth Circuit may have misapplied the provision.

Section 502(d) provides that “the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.” The Sixth Circuit concluded that this provision operates to effectively extend the time that a trustee has to use the avoiding powers even after the expiration of the normally applicable statute of limitations. The court stated:

Section 502(d) does not refer to § 546(a)(1)(A)’s two-year statute of limitations, nor does § 502(d) contain a limitations period of its own. See 11 U.S.C. § 502(d); see also McLean Indus., 196 B.R. at 676-77 (” ‘If such a limitations period on claim objections under section 502(d) was intended by Congress, it easily could have included a reference to section 502(d) in section 546(a).’ “)(quoting In re Stoecker, 143 B.R. 118, 132 (Bankr.N.D.Ill.1992)). At bottom, nothing in the text of § 502(d) prevents a trustee from using his avoidance powers defensively after the expiration of the statute of limitations set forth in § 546(a)(1)(A).

In re McKenzie, 737 F.3d 1034, 1039 (6th Cir. 2013).

The court’s view is troubling in that its interpretation of the section seems to ignore the requirement of the section that the creditor holds property that is “recoverable” under specific sections of the Bankruptcy Code. Arguably, the passage of time makes the transfer no longer “recoverable” under § 547. If that is the case, then § 502(d) would not apply, and the creditor could assert its claim in the case. Of course, the creditor would hold a secured claim, and that claim would not be paid from the assets that would be distributed to the holders of unsecured claims. If the creditor’s claim exceeded the value of the collateral, the creditor would hold an unsecured claim to that extent, and it would have a right to participate in the distribution of estate funds based on the amount of its unsecured claim.

The Sixth Circuit’s decision in McKenzie bars the creditor from pursuing any unsecured claim in the case. To that extent, the decision penalizes the creditor vis a vis other creditors. What the decision does not do, however, is to prevent the creditor from asserting its secured claim. The decision seems to do so, but the subsequent history of the case could be of assistance in determining the extent to which the court’s action improperly punishes secured creditors whose rights to their collateral should not be avoided once the statute of limitations period on avoidance actions has expired. Specifically, the decision that the court of appeals affirmed was a decision denying the creditor relief from the automatic stay of § 362 of the Bankruptcy Code. Importantly, the court did not indicate what would happen next in the case. Denying relief from the stay does not indicate what happened to the property that was collateral for the extension of credit. If the property remained in the estate, it is still there for the creditor to seek at a later time (although the denial of relief from the stay suggests that another such motion would be futile). The creditor or the trustee could seek to have the property sold, but the property is still subject to the creditor’s security interest. The property could be sold subject to that interest, and it would then be in the hands of a third party and would be subject to the security interest. If the trustee sought to sell the property free and clear of the security interest, that interest should still attach to the proceeds of the sale under § 363. Regardless of the form of the sale, the secured creditor still should receive the value of its claim from the proceeds of the sale. This is consistent with the long standing policy of the bankruptcy laws that a lien against property survives a bankruptcy notwithstanding any discharge that the debtor may receive.

Assuming that the value of the collateral is less than the outstanding debt that is secured, if the property is sold and the proceeds paid to the secured creditor, the estate (and other unsecured creditors) will be enriched in that the total unsecured claims in the case will be reduced in the amount of the unsecured balance still owed to the creditor. The secured creditor will be damaged in the amount that it would have recovered if its unsecured claim shared pro rata in the distribution of the estate’s assets to the unsecured creditor class. In the meantime, the estate has incurred significant administrative expenses from the litigation of the issues in the case all the way to the court of appeals. Perhaps all would have been better served by a settlement of the stay relief litigation by a surrender of the property to the secured creditor in return for a waiver of the creditor’s unsecured claim. In future cases, trustees who have failed to act timely to attack certain transfers as avoidable may be reluctant to enter into such agreements given the decision in this case. That would be an unfortunate use of the Bankruptcy Code.



PWMA Briefing on Appellate Practice

Posted in Litigation, Ohio Law, Other Articles, PWMA Practice

From time to time we like to pass along educational opportunities that may be of interest to our subscribers. I am including details on an upcoming event that members of our Appellate and Supreme Court Practice are offering on the benefits of amicus advocacy before the Ohio Supreme Court.

Too often, the Ohio Supreme Court decides issues that affect an industry statewide without first having heard from the industry itself. Trade associations and companies can fill this gap by filing “friend of the court” briefs in Supreme Court cases that affect them. To learn more about how your organization can be part of this process, please join Kathleen Trafford, Brad Hughes, and Dennis Hirsch of our Appellate Practice Group on April 8, 2014 for a breakfast briefing. Using a roundtable format, they plan to cover the benefits of amicus advocacy, strategies for effective amicus advocacy, and the rules governing “friend of the court” briefs.



Tuesday, April 8, 2014
7:30 a.m. – 8 a.m.
Registration and breakfast
8 a.m. – 9 a.m.
Roundtable discussion


Porter Wright
41 S. High St., 29th Floor
Columbus, OH 43215


Ohio Supreme Court Resolves Certified Conflict Regarding Oral Forbearance Agreements

Posted in Bank Lending, Bank Litigation, Collection and Foreclosure, Commercial Law, Commercial Lending, Commercial Loans and Leases, Community Banking, Ohio Law, Real Estate

Last Spring, we discussed on this blog a trifecta of noteworthy lending cases pending before the Ohio Supreme Court. Today, the Court resolved one of them, and in doing so also resolved a certified conflict among Ohio’s appellate districts regarding whether Ohio’s Statute of Frauds bars a party from relying on an oral forbearance agreement to defeat a judgment that was entered pursuant to a written contract. The court’s unanimous opinion in FirstMerit Bank, N.A. v. Inks, Slip Opinion No. 2014-Ohio-789, is available here.

Daniel Inks, Deborah Inks, David Slyman, and Jacqueline Slyman guaranteed that Ashland Lakes, LLC would repay a $3.5 million loan from FirstMerit Bank. When the LLC defaulted, FirstMerit sued the guarantors, and the trial court awarded judgment to FirstMerit based on confessions of judgment entered by the defendants under warrants of attorney. The Slymans and Inkses then appealed to Ohio’s Ninth District Court of Appeals on the basis that the confessing lawyer did not produce the original warrants of attorney. After filing that (ultimately unsuccessful) appeal, the Slymans and Inkses also moved the trial court for relief from judgment, arguing that FirstMerit was not entitled to recover because it had entered into an oral forbearance agreement with the LLC. The trial court concluded that this argument was barred by Ohio’s Statute of Frauds, and the Slymans and Inkses appealed from that decision as well. The Ninth District Court of Appeals reversed the trial court’s decision on the Statute of Frauds, saying:

By its plain language, the [Statute of Frauds] prohibits a party from “bringing an action on a loan agreement” unless the agreement is in writing. In this case, the Slymans and Inkses did not attempt to “bring an action” against FirstMerit, they merely raised the oral forbearance agreement as a defense to FirstMerit’s action against them.

FirstMerit asked the Ninth District to certify a conflict between its decision and that of multiple other appellate districts, and the Ninth District agreed that its judgment conflicted with that of Ohio’s Tenth District Court of Appeals more than a decade ago in Nicolozakes v. Deryk Babrield Tangeman Irrevocable Trust, 10th Dist. No. 00AP-7, 2000 WL 1877521 (Dec. 26, 2000). In Nicolozakes, the Tenth District held that the Statute of Frauds barred Ms. Tangeman from defending against a foreclosure action by alleging that Mr. Nicolozakes had orally released her from a note and mortgage.

FirstMerit’s certified-conflict case in the Ohio Supreme Court attracted the attention of the Ohio Banker’s League, which filed an amicus brief supporting FirstMerit. The Bankers’ League noted that allowing parties to enforce oral forbearance agreements would undermine the Statute of Frauds’ key role in reducing systemic risk in the financial services industry.

Today, the Ohio Supreme Court reversed the Ninth District and followed the Tenth District’s approach. Justice O’Donnell’s opinion for the unanimous Court relies on caselaw from the nineteenth century to bolster the Statute of Frauds’ application to bar certain oral agreements from being used as the basis for defenses, in addition to affirmative claims. The Court also confirmed that the alleged oral agreement between the Inkses and FirstMerit “does pertain to an interest in land, because it involves the terms upon which FirstMerit allegedly agreed to release the mortgage. As such, even if it is characterized as a settlement agreement, it falls within [the Statute of Frauds].” Opinion, para. 25.


Roundup: Recent Business Developments

Posted in Health Care Lending, Labor Law, Product Liability, Summary of PorterWright blog posts

The first six weeks of 2014 have been abundant with news and cases that provide insight for financial institutions (and other businesses) that need to be aware of regulatory, legislative and judicial developments and how they affect the U.S. business environment.

Porter Wright attorneys have written several alerts and articles about recent cases and best practices; we offer a summary below.

A merger for better healthcare…no problem, right? Wrong, says the FTC

By now, you likely are accustomed to hearing about the federal government challenging the merger of two hospitals or health systems. More often than not these days, the federal government wins. That is true even in the face of claims by the parties the merger is necessary to reduce costs and/or improve the quality of health care provided — the very foundation for the Affordable Care Act. Continue Reading

Planning For Leasehold Financing

Posted in Commercial Lending, Commercial Loans and Leases, Finance, Ohio Law, Other Articles, Real Estate

Commercial leases often lack leasehold financing provisions despite the significant impact such provisions can have on the business dealings of the tenant during the term of the lease.

Long-term, creditworthy tenants, those who have value in their leaseholds such as restaurants and hotels, are often prime candidates for leasehold financing. A leasehold mortgage is very similar to a regular mortgage, except that, if a default occurs the holder of a leasehold mortgage has the right to foreclose not by conducting a sale of the building, but instead by taking over as the tenant under the lease. Usually a leasehold mortgage also includes a pledge of the tenant’s personal property on the leased premises, and by foreclosing the leasehold mortgage, the mortgage holder also takes title to the personal property in the leased premises. Because giving a leasehold mortgage does not require the mortgagor to own the real property it mortgages, leasehold financing allows businesses that rent space, and rather than own property, to obtain financing for their businesses.

Many businesses eligible for leasehold mortgages cannot reap the benefits of such arrangements due to restrictions in their leases on leasehold financing. Many commercial leases contain a general prohibition on any and all “transfers” of the lease. Absent an express exception in the lease, such an anti-transfer provision would likely be interpreted to prohibit the tenant from entering into a leasehold mortgage. The best time to consider leasehold financing provisions is during the drafting and negotiation of the lease, when the tenant still has some leverage. Continue Reading

What Happens When You Lose: The Downside of Binding Arbitration

Posted in Arbitration, Commercial Law, SIxth Circuit

A recent decision by the United States Court of Appeals for the Sixth Circuit demonstrates binding arbitration may not be the best way to limit rising litigation costs. It also serves as a warning – if you needed one — that “binding” arbitration awards are not subject to appeal for legal error.

Here are the facts, in a brief form: Two individuals (Schafer and Block) founded a company. As part of a series of corporate transactions, two employee stock ownership plans (“ESOPs”) were formed. Schafer and Block were appointed as trustees of the ESOPs, and entered into indemnification agreements with mandatory arbitration clauses. While the Department of Labor (“DOL”) was investigating its suspicion that the ESOPs had purchased stock at inflated prices, and with knowledge of this investigation, Multiband entered into a purchase agreement to buy the holding company. As part of the transaction, Multiband entered into indemnification agreements that contained essentially the same provisions as the prior indemnification agreements. Subsequently, the DOL informed Schafer and Block that it believed they had breached their fiduciary duties by allowing the ESOPs to purchase stock at inflated prices and offered to settle. Schafer and Block asked Multiband to indemnify them in accordance with the agreements, but Multiband refused. Schafer and Block did in fact settle with the DOL and made a claim for indemnification against Multiband, but Multiband again refused to indemnify them. Continue Reading

Special Rules Apply to Agribusiness Financing

Posted in Agricultural Lending

Secured lenders to the agricultural industry — broadly meaning any farm or business producing or transporting perishable food items or commodity inputs for food production  — must be aware of wide range of laws and regulations. Our Agricultural Industry Financing eBook describes important and sometimes overlooked nuances of taking and enforcing liens in agricultural commodities. Download the Agricultural Industry Financing eBook.