Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

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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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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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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