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Banking & Finance Law Report

Category Archives: Collection and Foreclosure

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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, …


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Banking & Finance Law Report Top 10: News and Trends from 2013

Posted in Agricultural Lending, Bank Lending, Bank Regulation, Collection and Foreclosure, Commercial Lending, Community Banking, Health Care Lending, Ohio Law, Real Estate

2013 was an active year for the Banking & Finance Law Report. Our authors covered a wide range of topics — from legislative and regulatory changes to court opinions to financing and bankruptcy matters in the healthcare, agricultural and oil and gas industries. To offer a glimpse into the news and trends of the past year, following is a synopsis of the 10 best-read articles of 2013.

1. Major Changes to Affirmative Action Requirements Become Effective March 24, 2014
by Mike Underwood

In just two months, financial institute and other types of employers will need to comply with new affirmative action rules that:

  • Require employers to gather and retain data showing the results of their recruiting and hiring efforts and to set numeric targets for hiring veterans and disabled persons
  • Include significant additional obligations for reviewing, analyzing and documenting good-faith efforts and results
  • Specify that employers must offer applicants the opportunity to self-identify as a covered veteran or disabled person before a job offer occurs

Many employers may face a real challenge identifying and networking with recruiting sources that can refer qualified candidates for their businesses. They also will likely need to adjust data collection, retention, and analysis processes. Read the full article.

2. Ohio Passes Legislation Preventing Recovery on “Cherryland” Insolvency Carveouts in Nonrecourse Loans, Among Other Changes
by Amy Strang

Ohio’s Legacy Trust Act (Am. Sub. H.B. 479), which became effective in March 2013, prohibits the use of post-closing solvency covenants as nonrecourse carveouts in a nonrecourse …


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Agreeing to Renegotiate a Loan Does Not Waive Lender’s Right to Foreclose

Posted in Bank Lending, Bank Litigation, Collection and Foreclosure, Commercial Lending, Real Estate, Workouts

In its Oct. 30, 2013 decision in General Electric Capital Corporation v. Tartan Fields Gold Club, Ltd., et al., 2013-Ohio-4875, the Fifth District Court of Appeals made clear that a lender does not waive its right to enforce its rights upon the borrower’s default merely entering into negotiations to restructure a loan; the court further held that the lender’s enforcement of its default rights during negotiations is not an act of bad faith. The court also relied on longstanding Ohio precedent that without more, a lender does not have a fiduciary relationship with a borrower.

In 2007, Tartan Fields Golf Club, Ltd. borrowed $13.3 million from GECC and secured the loan with a mortgage on its Delaware County golf course development. When Tartan Fields approached GECC in early 2009 about renegotiating the loan, GECC required that Tartan Fields sign a “Pre-Negotiation Agreement” that provided, among other things, that Tartan acknowledged that GECC had no fiduciary, confidential or special relationship with GECC; the Pre-Negotiation Agreement also gave both parties the unilateral right to terminate negotiations with three business days’ notice to the other party in their sole discretion and contained an integration clause.…


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Appellate Court Rules That Creditor Cannot Cog on an Accelerated Debt

Posted in Collection and Foreclosure, Ohio Law

In The Henry County Bank v. Stimmels, Inc., et al., 3rd Dist. No. 7-12-19, 2013-Ohio-1607 (Apr. 22, 2013) the Third Appellate District Court rendered a decision that will dismay commercial creditor’s rights attorneys in Ohio in holding that a warrant of attorney to confession judgment R.C. §2323.13 may only be used if the debtor was in default of payment, even where the debt had been accelerated.

The Henry County Bank obtained a cognovit judgment against the defendants, claiming as events of default the defendants’ failures to pay taxes when due and to maintain a stated indebtedness to tangible net worth ratio. After receiving notice of the judgment, the defendants filed a motion under Civil Rule 60(B) to vacate the cognovit judgment. The defendants supported their motion with an affidavit stating that they were not in default of payment, and here is the key: despite having accelerated the debt, the bank stipulated that the defendants were not in default of payment.

The trial court denied the defendants’ motion for relief after a hearing and supplemental briefs, and the defendants filed an appeal. Their sole assignment of error was that the trial court erred in granting judgment on the note without the bank asserting or proving that the defendants failed to pay on time, arguing that a warrant of attorney to confess judgment under R.C. §2323.13 could be used in a payment default situation.

Noting that "cognovit judgments are generally disfavored in the law" {¶8} and that R.C. §2323.13 is to "be strictly construed" …


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Signs of Trouble Before Payment Default

Posted in Bank Lending, Bank Litigation, Bankruptcy, Collection and Foreclosure, Commercial Lending, Commercial Loans and Leases

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

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Update to SMLCC Charging Order Blog Post

Posted in Collection and Foreclosure

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 …


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Charging Order Protection for Multi-Member and Single Member LLCs

Posted in Collection and Foreclosure

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 …


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