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

Commercial lenders will be glad to learn the Supreme Court of Ohio recently released a slip opinion overturning the Eighth District Court of Appeals' decision in JNT Properties, LLC v. KeyBank, Nat'l Assoc. and concluding that KeyBank's use of a "365/360" method of interest calculation in a commercial promissory note was not ambiguous.

As previously reported in our July 2011 and January 2012 blog posts, this case concerned KeyBank's use of the 365/360 method of interest calculation. The promissory note at issue set the initial interest rate at 8.93% per annum, but also stated:

The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

The Court of Appeals held on June 30, 2011, that the language describing the 365/360 method could not "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." (The use of the 365/360 method of computation resulted instead in an effective interest rate of 9.05% per annum.)

On appeal by KeyBank, which was supported by an amici curae brief of the American Bankers Association and the Ohio Bankers League, the Supreme Court of Ohio reversed. The Supreme Court found that although the note's payment clause inartfully referred to computation of the "annual interest rate" rather than "annual interest," the imprecision was "not so confusing that a reasonable person would think that the rate set by the note would be calculated using something other than 365/360 method."  The court recognized that the 365/360 method is the most commonly used method of interest calculation in commercial loans and that it was "clear that the term being defined [was] not the annual interest rate but rather the method of computing regular interest payments." 

Although the ultimate result in JNT Properties came out in favor of the lender, lenders should seek experienced legal guidance when crafting interest calculation language to increase the likelihood that they receive the expected yield and avoid unnecessary litigation.

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In mid-September, an Ohio appellate court rendered a decision in a long-pending dispute that raises an important issue for health care lenders: the impact of a contested certificate of need application. The impact of such a contest should be carefully considered by health care lenders.

On September 18, 2012, the Ohio Tenth District Court of Appeals rendered a decision in In re Altercare of Stow Rehabilitation Center (091812 OHCA10, 12AP-29). The parties to the appellate case were Schroer Properties of Stow, Inc. ("Schroer") and Kent Care Center (“Kent”). At issue was Schroer’s decision to relocate 31 nursing home beds from 3 other Stark County, Ohio, nursing facilities and to a new facility, Altercare of Stow Rehabilitation Center ("Altercare Stow"), to be constructed in Stow, Summit County, Ohio.

Schroer submitted its Certificate of Need (“CON”) application in July, 2007, but the Ohio Department of Health (“ODH”) did not declare the application “complete” until February 28, 2011, nearly 4 years after Schroer’s initial submission.

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Secured creditors of borrowers holding Federal Communications Commission ("FCC") broadcasting licenses, as well as such borrowers seeking credit, will be reassured by a recent decision of the United States Court of Appeals for the Tenth Circuit, In re: Tracy Broadcasting Corporation, released October 16, 2012. The Tenth Circuit has joined other courts in upholding the priority of a creditor's security interest over that of unsecured creditors in the post-bankruptcy sale proceeds of an FCC broadcasting license. The decision reversed the decisions of lower courts and held that "a security interest in the proceeds of a license attaches when the licensee enters into the security agreement, regardless of whether a sale [of the license] is contemplated at that time."

In 2008, Tracy Broadcasting (the "Debtor") issued a promissory note in favor of Valley Bank & Trust Company (the "Secured Creditor") and secured such obligations with various assets, including its general intangibles and the proceeds of such collateral. In 2009, the Debtor filed a Chapter 11 petition in the U.S. Bankruptcy Court for the District of Colorado. An unsecured creditor of the Debtor brought an adversary action to determine the extent of the Secured Creditor's security interest in the proceeds of the sale of the Debtor's license.

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This article is Part Five in a seven-part series on how to structure sales and what to do when your customer fails to pay.  You can find previous articles in this series here: Structuring Sales to Ensure Payment; Signs of Trouble Before Payment Default; Default by a Customer; Knowledge is Power and What to Consider When Non-Payment Leads to Litigation.  Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.

You have obtained money judgment against your debtor, thus turning you into a "judgment creditor" and them into a "judgment debtor", and now it's time to convert that important piece of paper called a "certificate of judgment" into cash or something that can be reduced to cash.  First, determine what assets are available to pay your judgment, then determine how to access them.

Analyze the Debtor's Assets

There are a number of sources of information about your judgment debtor's assets and financial situation, including the following:

•   Examine financial statements that the judgment debtor provided during the course of your business relationship to identify available assets.

•   If you subscribe to Dun and Bradstreet, obtain a Dun and Bradstreet report.

•   Determine whether there are any legal actions pending against the judgment debtor, which may mean you will be in a race to recover assets, or whether the judgment debtor is suing someone, which may provide you a source of recovery.  Most court clerks' records are available on line and are searchable by name.  If you are concerned that your judgment debtor has filed for bankruptcy protection, contact the Bankruptcy Court clerk for the district where your business judgment debtor was incorporated or formed or has its principal place of business.

•   If the debtor is a corporation it may be possible to pierce the corporate veil and recover against assets of stockholders.

•   Determine if there has been a preferential transfer or a fraudulent transfer in violation of the governing state's law.

•   Once you are a judgment creditor, you may also ask the court that issued your judgment to schedule a judgment debtor examination of the judgment debtor or a third party.  This is an examination under oath with a court reporter at which a judgment creditor may ask the judgment creditor questions about their assets, liabilities, cash flow and expenses.

•   Keep your ear to the ground.  Competitors, clients, customers, neighboring businesses and co-defendants of the judgment debtor may be sources of information regarding who the debtor does business with, what accounts receivable are available or whether the judgment debtor is still in business or has formed a new business.

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This article is Part Four in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find previous articles in this series here: Structuring Sales to Ensure Payment; Signs of Trouble Before Payment Default and Default by a Customer: Knowledge is Power.  Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.

The previous article in this series, Default by a Customer: Knowledge is Power, outlined how to negotiate favorable terms with the customer to avoid default, proceed with litigation against the customer before there is a deluge, and prepare for a bankruptcy by the customer. This article will cover key considerations as you head toward litigation with a customer in default.

Determine Your Weaknesses

•   Determine if you as vendor or service provider are subject to any counterclaims if you sue your customer for nonpayment. Might the customer assert that the goods sold or services provided were faulty, not in accordance with contract, or otherwise unacceptable? Your customer will have a difficult time proving its counterclaim if it has retained the goods you sold without complaint, has incorporated them into their product or resold them.

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This article is Part Three in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find previous article in this series here: Structuring Sales to Ensure Payment, Signs of Trouble Before Payment Default. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.

By understanding your position prior to or shortly after a default by the customer, it may be possible to negotiate favorable terms with the customer to avoid default, proceed with litigation against the customer before there is a deluge or prepare for a bankruptcy by the customer. To identify your options and rights as a vendor you must first determine the following:

1.      Default provisions;

2.      Default notice requirements;

3.      Permitted interest, late charges and attorney fees;

4.      The existence of guaranties (corporate or individual);

5.      Existing or potential collateral and available equity; and

6.      Where you would need to sue, i.e., jurisdiction. 

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This article is Part Two in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find Part One of this series here: Structuring Sales to Ensure Payment. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series. 

With the recent economic slowdown in many sectors and the parade of corrupt corporate executives on the evening news, corporate managers are more sensitive than ever to signs of troubled business practices and how those practices affect outstanding receivables.  Many distressed businesses display early warning signs of impending trouble, including some or all of the following:

• Lack of a sound business plan- The company may not have a plan or may have expanded past the vision of it original business plan.

• Ineffective management style- The management of a small company that has experienced rapid growth may not be able to delegate authority effectively. 

• Poor lender/vendor relationships- The company may not respond quickly or fully to its vendor’s request for financial information or may actively hide information from its vendors.

• Change in market conditions- The market for the company’s product may have changed, leaving the company with a shrinking market share and lower sales. The company’s technology or marketing may be obsolete to compete in the current marketplace (remember 8-track tapes?).

• Over-diversification of products- The company may enter non-traditional markets too quickly in an effort to increase flagging sales but without the necessary resources or knowledge to compete successfully in the new market.

• Geographic expansion- The company expands its footprint too quickly, straining managerial and financial resources. These signs should alert the vendor that the company may be a candidate for default on existing obligations.  The prudent vendor should heed these signs and take immediate action to protect its interests in the event the company defaults on its obligations or seeks protection from its creditors under the Bankruptcy Code.  Consider shortening payment terms, going to credit card payment or cash on delivery, a consignment sale format or taking a security interest in the customer's assets of obtaining a guaranty from a financially reliable insider.

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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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