Ohio Supreme Court to Hear Oral Arguments Regarding Adequacy of "Website Notice" of Sheriff Sales

Posted on May 17, 2012 by Brad Hughes

On May 23, the Ohio Supreme Court will hear oral arguments in an appeal by PHH Mortgage Corporation that concerns whether a sheriff’s website can provide constitutionally sufficient notice of the date, time, and location of a sheriff’s sale of foreclosed property. Real estate lenders of all sorts will be interested in the outcome which has important implications for foreclosure proceedings.

Nearly two decades ago, in Central Trust Co. v. Jensen, 67 Ohio St.3d 140 (1993), the Supreme Court held that notice by mail or other “equally reliable” means is a constitutional prerequisite to a proceeding that adversely affects a party’s property interests, when the interest holder’s address is known or easily ascertainable. The PHH Mortgage Corp. case tests that principle in the Internet age.

In PHH Mortgage, the mortgage company (“PHH”) filed a foreclosure action in April 2008, and the trial court’s final judgment in favor of the company was entered the following September. The property was then to be sold through the Clermont County Sheriff’s Office. On three occasions in 2009, the order of sale was withdrawn. On each of these occasions, PHH was notified by mail of the date and time for the sale. The trial court scheduled a fourth sale for April 2010. But PHH did not receive notice by mail of this sale, because at some point before then the sheriff’s office (due to budget constraints) had stopped sending notice by mail of upcoming sales, and began publishing the sale dates on its website. So, even though PHH intended to bid on the property at the sale, it did not receive notice by mail of the sale, and the property sold for an amount substantially less than the debt owed to PHH and far below what it intended to bid.

The Clermont County Court of Appeals determined that counsel for PHH was notified that he would need to check the sheriff’s website for future sale dates, and that “notice by website is, at the very least, equally reliable to notice by mail.” The court of appeals thus concluded that the requirements of due process and Central Trust had been satisfied and refused to set aside the sale.

PHH contends that the court of appeals’ decision effectively overturns Central Trust and approves a method of notice – what PHH calls “constructive notice by website” – that is more akin to notice by publication, rather than actual notice. PHH also notes that the General Assembly amended R.C. 2329.26 and .27 after Central Trust to require that written notice of the date, time, and place of an execution sale be given to parties in a foreclosure action.

The appeal has attracted the participation of several Legal Aid organizations across the State who have aligned themselves with PHH and contend that “constructive internet notice” is not “equally reliable” as actual written notice, given that many Ohioans in rural and low-income communities have limited access to the Internet. Stay tuned to this blog for updates on the decision in this appeal.

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SEC Guidance for JOBS Act

Posted on April 27, 2012 by Jack J. Gravelle

Bankers and financial institution executives should note that the Securities and Exchange Commission has released guidance and other information regarding the Jumpstart Our Business Startups Act of 2012, or JOBS Act, that became law a few weeks ago.

The JOBS makes significant changes to how banks and other businesses can raise capital. It does this by:

·         Easing the IPO process and reporting requirements for emerging growth companies;

·         Reducing general solicitation and general advertising restrictions for certain private placements;

·         Creating a new $50 million small public offering exemption;

·         Creating a “crowdfunding” private placement exemption; and

·         Perhaps most importantly, for community banks and bank holding companies, increasing the number of shareholders a private company may have without having to publicly report under the Securities Exchange Act of 1934, including specific thresholds for banks and bank holding companies.

A summary of the JOBS Act is provided here.

The recent SEC guidance and other information is outlined below.

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NLRB Posting Rule Postponed Indefinitely

Posted on April 23, 2012 by Mike Underwood

Bankers and other employers should note that the National Labor Relations Board (NLRB) has postponed indefinitely the effective date for its employee rights posting requirement. The posting rule, which was to have taken effect April 30, 2012, required all employers to post in the workplace a notice advising employees of their rights to engage in union organizing. The proposed posting rule has generated a great deal of controversy. 

Lawsuits challenging the rule filed by the United States Chamber of Commerce, the National Manufacturer's Association, and other employer interest groups are pending in two federal courts.  Initial decisions in the lower courts were inconsistent.

In March the federal District Court for the District of Columbia upheld the NLRB's right to impose the rule. Then, on April 13, a District Court in South Carolina ruled that the NLRB does not have the right to impose the posting requirement. The decision from the District Court for the District of Columbia has been appealed to the D.C. Circuit Court of Appeals and it is expected the NLRB will appeal the South Carolina District Court decision to the Fourth Circuit Court of Appeals. On April 16, the D.C. Circuit Court of Appeals issued an injunction barring the NLRB from enforcing its rule while the appeal in that Court is pending.

The NLRB has decided to delay enforcing its rule while the legal challenges are pending.

Employers have not seen the last of this issue, but it appears it will be at least a number of months before anything changes. The D.C. Court of Appeals has set a briefing schedule and will hear oral arguments in September. It is unclear as of now how long the possible appeal in the South Carolina case might take. It is even possible there will be conflicting decisions in the two Courts of Appeal and the dispute might end up before the United States Supreme Court.

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Workers' Compensation Considerations When Purchasing a Company

Posted on April 16, 2012 by Rebecca A. Kopp

When a purchase of a business takes place in Ohio, the purchaser often overlooks the fact that it will assume the sellers' workers' compensation claims experience either in part or in whole. The Bureau of Workers' Compensation ("BWC") has taken a fairly strict line in combining and transferring coverage to purchasers.

When a new owner wholly assumes the former employer's business, the BWC transfers all of the employer's claims experience to the purchaser. If the new owner purchases a portion of the business, only a part of the former employer's experience will be transferred. Even if the parties enter into asset purchase agreements, which demonstrate that the entities are not undergoing an acquisition or merger, the BWC frequently determines that the purchaser is a successor to the predecessor employer's risk. As a result, the Bureau of Workers' Compensation transfers any and all existing and future liabilities and/or credits of the predecessor employer. As a result, the purchaser may find themselves obtaining an undesirable claims experience. Further, should the predecessor business fail to report payroll, fail to pay its premiums and/or penalties, these liabilities are transferred to the successor. As a result, a purchaser may inherit significant workers' compensation costs.

The BWC transfers a predecessor's obligations regardless of whether the predecessor's transfer to the successor was voluntary, through an asset purchase agreement, or through an intermediary bank or receivership. This is contrary to the concept of successor liability arising out of other types of contracts.

Therefore, it is critical for purchasers to evaluate a predecessor business' workers' compensation rates as part of the due diligence in undertaking a purchase of another business in whole or in part.

 

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Update to SMLCC Charging Order Blog Post

Posted on April 6, 2012 by Amy Strang

Substitute House Bill 48, an amendment to Ohio's Limited Liability Company Act, discussed in our December 9, 2011 post, Charging Order Protections for Multi-Member and Single-Member LLCs (SMLLCs), has been passed by the Ohio General Assembly and signed into law by Governor Kasich. This act amends ORC 1705.19 to expressly provide that a charging order is the "sole and exclusive remedy" of a creditor seeking to satisfy judgment against the LLC membership interest of a debtor and to prohibit any creditor of a member of an LLC from having any right to obtain possession of, or to exercise legal or equitable remedies with respect to, the property of the LLC. It also specifically limits the rights of a judgment creditor who has obtained a charging order against a debtor's membership interests to those of an assignee of a membership interest, as laid out in ORC 1705.18. The amendment will become effective May 4, 2012.

The act contains no exception for SMLLCs and makes a charging order a judgment creditor's exclusive remedy to reach the membership interests of its debtor. Because of this, it is likely that Ohio courts will interpret the statute to provide SMLLCs with the same charging order protections as multi-member LLCs, leaving creditors unable to recover judgments by forcing the sale of their debtors' SMLLC assets and distributing proceeds.

Bankers should take necessary precautions to avoid relying on unreachable assets of the debtor's SMLLC as security for the credit they extend. In most cases, the straight-forward solution is prepare loan documentation reflecting the SMLLC as a borrower.

 
More information about other aspects of the amendment and its effects can be found in our February 10, 2012 post about Ohio Corporate Law Changes. The text of Sub. HB 48 is available online here.

 

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JOBS Act Impact on Community Banks

Posted on March 27, 2012 by Jack J. Gravelle

The U.S. House of Representatives, by a vote of 380 to 41, has passed the Jumpstart Our Business Startups Act, or JOBS Act [link to House Bill], in the form previously approved by the Senate last week [link to Senate Amendment]. The bill now goes to President Obama, who is expected to sign it into law. The JOBS Act could significantly impact community banks, among other businesses, regarding the categories summarized below.

SEC Registration

The JOBS Act increases the threshold for SEC registration from 500 shareholders of record to 2,000 shareholders of record for banks and bank holding companies. The increase allows some banks to raise capital by selling stock to new investors without having to register under Section 12(g) of the Securities Exchange Act of 1934.

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Health Care Facility Financing-CHOW Requirements Impact Deal Timing

Posted on March 27, 2012 by Timothy Mitchell

Banks and other financial institutions need to understand how federal and state laws may impact closing a lending transaction in connection with a change of ownership ("CHOW") of a health care facility ("HCF"). Various laws implicated in a CHOW frequently include federal Medicare laws and state licensing, certificate of need, and Medicaid laws.

Under Medicare regulations, a CHOW is defined as any of the following: (a) in a partnership, the removal, addition or substitution of a partner, unless the partners expressly agree otherwise as permitted by state law; (b) in a sole proprietorship, the transfer of title to property to another party; (c) in a corporation, the merger of the corporation into another corporation, or the consolidation of two or more corporations, either of which results in the creation of a new corporation; or (d) a lease of all or part of the HCF. Commonly encountered CHOW transactions include asset sale and purchase transactions and lease transactions where the purchaser/lessee agrees to accept assignment of the current operator's Medicare provider agreement and number. (Note: It is possible for Medicare and Medicaid purposes for a purchaser/lessee to enroll as a new provider and not accept assignment of the Medicare and Medicaid provider agreements. However, that process will require substantially more time and will disrupt operations (and cash flow) of the HCF and is not, as a general rule, pursued by purchasers/lessees.) For Medicare purposes, a CHOW must be reported within 30 days of the effective date of the change. The Medicare administrative contractor will review the HCF's submission and make a recommendation for enrollment of the provider to the Centers for Medicare & Medicaid Services ("CMS"). If CMS approves the recommendation, it will issue a "tie-in" notice indicating the provider has been enrolled and may begin billing.

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Health Care Financing: Security Interests in Deposit Accounts containing Medicare/Medicaid Receivables

Posted on March 20, 2012 by Amy Strang

Lenders making secured loans to health care providers with Medicare and Medicaid receivables should be aware of limitations on their ability to perfect security interests in such borrowers' deposit accounts. Secured lenders may perfect security interests in their borrowers' accounts receivable (and identifiable cash proceeds therefrom) by filing UCC financing statements, but when proceeds of those accounts receivable are received by borrowers and deposited into borrowers' deposit accounts, security interests in the deposit accounts themselves can be perfected only by obtaining "control" over the deposit accounts pursuant to § 9-104(2) of the UCC.  In order to perfect such security interests in deposit accounts, revolving credit facilities are, therefore, typically subject to deposit account control agreements.  In a deposit account control agreement, the borrower, the secured lender and the depository bank agree that the depository bank will comply with instructions from the secured lender directing disposition of the funds in the deposit account, without further consent by the borrower. This arrangement enables the secured lender to obtain control over the deposit account, thereby perfecting its security interest in the deposit account pursuant to UCC §9-312(b).

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RECOUPMENT AND SETOFF ISSUES FOR HEALTH CARE LENDERS

Posted on March 2, 2012 by Jack R. Pigman

Health care lenders and others evaluating or relying on the financial strength of a healthcare provider need to think about the potential recoupment and setoff of claims against Medicare/Medicaid receivables of the provider. 

RECOUPMENT

Recoupment, which is the netting of two related claims which is the function of a single, unitary transaction between the parties, occurs in the normal course of business and is not stayed by the automatic stay in a bankruptcy proceeding. For example, if Party A sells 100 widgets to Party B, and Party B discovers that four of the widgets were not delivered, Party B will deduct (recoup) the invoice amount of each unit in making payment to Party A.

In dealing with Medicare/Medicaid recoupment issues in bankruptcy, two general approaches have been taken by the Circuit Courts of Appeal with respect to the netting of overpayments against accounts due to the provider.

In the Third Circuit, which includes Delaware, the Court has applied an integrated transaction test, which means generally that any recoupment of Medicare/Medicaid payments is viewed as yearly payments and therefore the government can only recoup overpayments against payments due for a single year. Most of the Circuit Courts have adopted a “logical relationship test” in which Medicare/Medicaid overpayments and any payments due are all part of the same transaction even if they are not in the same year or the services are not rendered to the same patients. States are also permitted to recoup amounts owed for hospital and bed taxes by withholding certain Medicare/Medicaid payments otherwise due. Some courts have gone so far as to provide that Medicaid recoupments can be made across service categories, such as nursing service overpayments being recouped from payments due for laboratory services.

SETOFF

Unlike recoupment, which occurs in the ordinary course of business, Section 362 of the Bankruptcy Code provides an automatic stay against any act to setoff. While the right of setoff is codified in Section 553 of the Bankruptcy Code, before a setoff may occur, relief from the automatic stay must be obtained from the Bankruptcy Court. Setoff, as opposed to recoupment, involves the mutuality of obligations owed between the parties rather than analysis of a single, unitary transaction between the parties. For example, if Party A borrows money from Party B bank, and Party A deposits funds with Party B in an account, there are two debtor/creditor relationships which are established. The bank (Party B) can setoff on the funds owed to Party A against the loan owed by Party A to Party B. 

In the context of insolvency, whether inside or outside of bankruptcy, the Courts have generally treated claims of the United States as a single creditor and, therefore, the U.S. can setoff debts owed to a health care provider by one agency against claims that another agency has against the provider. Thus, for example, under the single creditor or unitary payment doctrine, the U.S. can offset taxes owed by a Medicare/Medicaid provider against payments due to the provider.

There appears to be a split of case law on whether the unitary setoff right of the government has priority over a security interest even if the secured creditor has provided the relevant federal or other governmental units with actual notice of the security interest held by the secured party.

DEBTOR-IN-POSSESSION FINANCING ORDERS

In Chapter 11 bankruptcy cases, debtor-in-possession lenders often will try to obtain an assignment of and a security interest in Medicare/Medicaid accounts, and thereby limiting or eliminating the recoupment or setoff rights of the government. Section 362(B)(28) of the Bankruptcy Code provides that the automatic bankruptcy stay does not preclude the Secretary of Health and Human Services from excluding a specific provider from participation in the Medicare program or any other federal health care program. Thus, if lenders try to “prime” or otherwise create rights with respect to Medicare/Medicaid receivables, ultimately the Secretary of Health and Human Services can exclude the debtor-in-possession from participation in Medicare or other federal health care programs and thereby negate any priming or other provisions in favor of DIP lenders in a Court order which are inconsistent with the rights of the government.

CONCLUSION

As in most ongoing, normal business relationships, there are routine adjustments made based upon over or under shipments, quality issues, mistakes in billing and various forms of credits and allowances. Lenders to Medicare/Medicaid providers need to be acutely aware of the recoupment rights under those programs. In addition, there is always the risk that the Medicare/Medicaid receivable could be offset by the U.S. government based upon the tax liability or other sums due and owing by the health care provider to the government. In the bankruptcy context, the rules may vary on recoupment depending upon the judicial circuit the bankruptcy case is pending in. There also exists the possibility that, under certain circumstances, states may recoup for obligations owing and certainly both the federal government and state governments have setoff rights which are expressly acknowledged both in and out of the bankruptcy context. Finally, orders entered in bankruptcy cases in favor of a debtor-in-possession lender to a health care provider which would result in an assignment of or security interest in the provider’s Medicare/Medicaid receivables can be overridden by the simple act of excluding the provider from participation in federal health care programs.
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Ohio Corporate Law Changes

Posted on February 10, 2012 by William Kelly

Recently-enacted legislation makes a number of important changes to the Ohio General Corporation Law and the Ohio Limited Liability Company Act that financial institutions and their executives should consider.  The bill will become effective May 4, 2012.

Here are some key points:

Dissenting Shareholder  Rights:  The bill substantially changes our statutes, which have not been substantively amended since 1970, to make Ohio dissenting shareholder processes similar to those followed in other major commercial states, such as Delaware.  The significant provisions are:

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Estoppel in ERISA: Simple Mistakes Can Lead to Costly Litigation

Posted on February 2, 2012 by Seth J. Hanft

Estoppel in ERISA: Simple Mistakes Can Lead to Costly Litigation

Plan administrators need to take steps to ensure that the information they provide to plan participants is accurate. Otherwise, plan participants may use this misinformation to bring an estoppel claim.

In civil litigation, defendants have long relied on equitable estoppel as an affirmative defense. The basic elements of an equitable estoppel defense are:

  • a definite misrepresentation of fact made to another person with the expectation that they will rely on it; and
  • reasonable and detrimental reliance on the misrepresentation

See, e.g., Heckler v. Community Health Servs. of Crawford County. The rationale behind this defense is that a party who unfairly misrepresents facts should not then be permitted to benefit by means of such misrepresentation.

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Operating Subsidiaries - Protecting the Bank When Taking Title to Real Estate

Posted on January 24, 2012 by Todd Brannon

With certain limitations, a bank may own real estate it acquires by foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in satisfaction of a debt previously contracted. Ownership of such property can create potential liability for the bank in a number of ways, though most commonly from personal injuries which occur on the property (another possibility with the potential to be very costly is environmental liability). While insurance can mitigate much of this risk, it has its limitations and a bank has options to be further protected.

One way to mitigate the risk is for a bank to own such property in an operating subsidiary wholly owned by the bank. Ownership of the property in an operating subsidiary would help limit the liability exposure to the assets of the subsidiary and protect the bank itself. Thus, the bank's income and assets from other activities are insulated from the risks associated with property ownership. While common for large banks, many small banks do not have this level of protection in place, often because of the administrative burden associated with establishing a wholly owned subsidiary.

Under Ohio law, establishing an operating subsidiary requires a bank to submit a letter of notification to the superintendent of financial institutions in accordance with OAC 1301:1-3-10(B). The bank then must wait thirty (30) days for the superintendent to review the notification and, unless notified to the contrary, may establish the operating subsidiary for holding property. The operating subsidiary will be subject to the same laws and rules applicable to the bank.

With the large amount of property owned by banks in this current economic environment, many banks could face liability for personal injuries or other harms which occur related to the property. It may be in their best interest to act now and insulate the bank itself from those potential liabilities by establishing a wholly owned operating subsidiary, before it's too late.

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Update - JNT Properties v. Keybank: Ambiguity in the Calculation of Interest

Posted on January 20, 2012 by Amy Strang

On November 30, 2011, the Supreme Court of Ohio accepted KeyBank's appeal from the judgment in JNT Properties, LLC v. KeyBank, Nat'l Assoc., decided by the Eighth District Court of Appeals in Cuyahoga County, Ohio on June 30, 2011. As our July 2011 blog post, available here, explained, this case hinged on whether KeyBank's use of the "365/360 method" of interest calculation, resulting in an effective interest rate of 9.05% per annum, breached a promissory note pursuant to which JNT Properties had agreed to repay principal together with interest at the rate of 8.93% per annum. The Eighth District Court found that the "365/360 method" used in the case "cannot be read as clearly evidencing an intent of the parties to alter the ordinary meaning of the term 'per annum,' or as creating an 'annual interest rate' other than the stated rate of 8.93 percent."   2011-Ohio-3260, at ¶ 21 (internal quotations omitted). Concluding that genuine issues of material fact remained, the Eighth District Court reversed the trial court's grant of summary judgment in favor of KeyBank.

Since we last reported, KeyBank filed a Notice of Appeal of the case and Memorandum of Jurisdiction with the Supreme Court of Ohio on August 15, 2011. On the same date, the American Bankers Association and the Ohio Bankers League filed a Jurisdictional Memorandum of Amici Curae in support of KeyBank, arguing that the case is one of great public interest and could impact thousands of commercial loan transactions in Ohio. On November 30, 2011, in an entry by Chief Justice Maureen O'Connor, the Supreme Court of Ohio accepted the appeal.

The Supreme Court of Ohio's resolution of this case may prove to be significant, as the decision as it stands creates uncertainty and may possibly render unenforceable the "365/360 method" commonly used in loan documents. Lenders should seek professional guidance on crafting "365/360 method" interest calculation language to ensure they receive their expected yield and avoid costly and unnecessary litigation.

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Disclosure Requirements for Consumer and Business Deposit Accounts, as recently republished by the Consumer Financial Protection Bureau

Posted on January 19, 2012 by Amy Strang

A variety of federal laws and regulations require banks and financial institutions to make certain disclosures to holders of deposit accounts. Many of these disclosures are designed for consumer protection and accordingly, are only required to be made to those "consumer" deposit accountholders who hold deposit accounts primarily for personal, family, or household purposes.

Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") transferred the rulemaking authority for some of these consumer regulations from other federal regulators to the Consumer Financial Protection Bureau ("CFPB") on July 21, 2011. To reflect this change in authority, the CFPB has republished certain previously existing regulations to Title 12, Chapter X of the Code of Federal Regulations ("C.F.R."), effective December 30, 2011. (It is unclear when the older versions of these regulations will be removed from the CFPB's predecessors' sections of the C.F.R.) This recent republication included regulations requiring financial institutions to provide account disclosures, thus providing an excellent opportunity to review the newly republished regulations and take note of how disclosures required to be made to consumer deposit accountholders differ from those required to be made to business deposit accountholders.

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Charging Order Protection for Multi-Member and Single Member LLCs

Posted on December 9, 2011 by Amy Strang

In the course of their business, bankers routinely encounter single member limited liability companies ("SMLLCs"), entities commonly used in real estate and small businesses. Despite the prevalence of SMLLCs, there is a fundamental legal uncertainty as to whether the assets of an SMLLC share the same level of protection from its member's creditors as is provided to the assets of a multi-member LLC through the charging order remedy.

Depending on state law, bankers may or may not be able to reach the assets of their debtors' SMLLCs through a charging order. Furthermore, changes to Ohio law have recently been discussed in the Ohio Legislature which attempt to remove any uncertainty and would prevent bankers and other creditors from reaching assets of a SMLLC through a charging order.

The following analysis discusses recent case law from around the country examining a judgment creditor's ability to reach the assets of an SMLLC in which its debtor holds the sole membership interest. The LLC charging order is a remedy through which a creditor who has won a judgment may reach its debtor's membership interest in an LLC. State LLC statutes generally require the unanimous consent of all members (other than the assigning member) in order for the assignee of an LLC membership interest, such as a creditor who has attached its debtor's membership interest, to participate "as a member" in the management of the LLC. To protect this approval right of the other members in a multi-member LLC, a charging order entitles a creditor only to the debtor's share of distributions and assets upon dissolution, and not to the right to participate in the management of the LLC. This prevents the judgment creditor from selling the LLC's assets and distributing the proceeds to itself.

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