Header graphic for print
Banking & Finance Law Report

Category Archives: Commercial Lending

Subscribe to Commercial Lending RSS Feed

An Ohio Alternative – Foreclosure Sales Conducted by a Special Master

Posted in Collection and Foreclosure, Commercial Lending

Lenders can typically credit bid at sheriff’s sales in an amount well in excess of the minimum bid requirements, as a result of which some real estate investors shy away from attending and bidding at sheriff’s sales because they feel like they won’t necessarily get a “bargain”.  Accordingly, lenders are typically the successful purchaser at sheriff’s sales.  However, the epic credit meltdown that began in 2008 resulted in lenders’ REO (real estate owned by the lender) spiking to the point where, beginning in 2009 or 2010, lenders—especially on the residential real estate side–no longer wanted to be the purchaser at foreclosure sale.   This caused them to consider—particularly after being bombarded with pitches from real estate auction houses–using a “special master” instead of the sheriff to conduct foreclosure sales, with the thought that the sales would be well attended by buyers not concerned with being outbid by the first mortgagee.

Pursuant to Revised Code § 2329.34, a master commissioner may be appointed by the court to sell real property. Such sales often work more like a private auction than a public sale, with specialized brokers performing targeted advertising prior to the sale.  Although auction companies usually don’t mention this when marketing their services to lenders, the scenarios under which a court may appoint such a special master are limited, however, to those situations where “there exists some special reason why the sale should not be made by the sheriff of the county where the decree or order was made, which


Continue Reading →

FDIC Guidance on Agricultural Credits

Posted in Agricultural Lending, Bank Lending, Bank Regulation, Commercial Lending, Community Banking, Regulation and Compliance

At a time of relative affluence in the farming industry, the FDIC has issued a warning on a need for monitoring agricultural credits. FIL-39-2014 (July 16, 2014) suggests that banking institutions of all sizes should carefully consider a recent, negative projection by the U.S. Department of Agriculture.

While current market conditions are good, the projection suggests there will be a slowdown in the growth of the farming and livestock sectors and that agriculture may be affected by adverse weather and declining land values, among other factors.

The guidance suggests that financial institutions should work carefully with agricultural borrowers when they experience financial difficulties. The guidance states that the FDIC’s supervisory expectations previously expressed in a 2010 financial institution letter continue (although the letter is rescinded in light of the current letter).

Cash flow analysis, secondary repayment sources and collateral support levels must be considered in order to properly analyze agricultural credits, according to the guidance.

The guidance notes that smaller farms and ranches rely on the personal wealth and resources of the owners, including off-farm wages. A universal review of the financial strength of the credit is required.

The guidance also notes workout strategies must be specifically tailored for agricultural credits in light of experience in the 1980’s with depreciating farm land values, among other factors. The guidance suggests that properly restructured loans to farming operations with a documented ability to repay under the modified terms will not be subject to adverse classification because the value of the underlying collateral …


Continue Reading →

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, …


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 …


Continue Reading →

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 …


Continue Reading →

It’s Easy, People: Read Before You Sign

Posted in Bank Lending, Commercial Lending, Community Banking, Other Articles, Workouts

In a decision that will warm the hearts of vendors everywhere, the Court of Appeals for Ohio’s Eighth Appellate District recently upheld the enforceability of personal guaranty language in a credit application. See Wholesale Builders Supply, Inc. v. Green-Source Development, L.L.C., et al., 2013-Ohio-5129. This decision also serves as a reminder to read before signing.

The form of credit application used by Wholesale Builders Supply, Inc. (“Wholesale”) with prospective customers included the following language:

BY SIGNING THIS AGREEMENT YOU ARE BOTH PERSONALLY AND CORPORATELY LIABLE FOR THE TOTAL OF YOUR PURCHASES BY YOU OR ANYONE DESIGNATED TO SIGN FOR YOUR PURCHASES ON YOUR ACCOUNT.

Defendant Green Building Technology, L.L.C. (“Green”), through its principal John A. Pumper (“Pumper”), executed one of Wholesale’s credit applications, and Green thereafter ordered and received goods from Wholesale, along with invoices from Wholesale.…


Continue Reading →

Amendment to Agricultural Lien Law Reinforces Decision in Ohio Dept. of Agriculture v. Central Erie Supply & Elevator Association

Posted in Agricultural Lending, Bank Lending, Commercial Lending, Commercial Loans and Leases, Finance, Lien Perfection, UCC Questions

A recent change to Ohio’s agricultural lien law clarifies the interplay between security interests governed by Article 9 of the UCC and those governed by Ohio’s agricultural lien statutes, and confirms the ruling of the Sixth Appellate Court of Erie County in Ohio Dept. of Agriculture v. Central Erie Supply & Elevator Association, 2013-Ohio-3061.

Central Erie Supply & Elevator Association (Central Erie) operated a grain elevator that it used to receive grain and other commodities from farmers (known as “claimants” under the statutory scheme) and sell the commodities to third parties. This made Central Erie an “agricultural commodity handler” under Ohio Revised Code Chapter 926. Pursuant to ORC § 926.021(C), the claimants who provided commodities to Central Erie retained a statutory lien on the commodities until they were paid.…


Continue Reading →

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.…


Continue Reading →

Lending Issues to Consider With Respect to The Perishable Agricultural Commodities Act of 1930

Posted in Agricultural Lending, Bank Lending, Commercial Lending, Commercial Loans and Leases, Lien Perfection, Ohio Law

Secured lenders extending financial accommodations to borrowers whose collateral includes perishable food items should consider certain specific risks associated with such collateral. Notably, the Perishable Agricultural Commodities Act of 1930 (PACA) creates a statutory trust for the benefit of persons who originally sell the perishable agricultural commodities to such borrowers and are not paid. The PACA trust creates a tier of claims that “float above” the secured lenders’ priority interests in the perishable agricultural commodities. Thus, until all suppliers of perishable agricultural commodities to a borrower are paid in full, a secured lender’s security interests in the borrower’s collateral consisting of perishable agricultural commodities or the proceeds thereof are trumped by the sellers’ PACA claims. Types of borrowers whose collateral may be subject to these PACA statutory trusts include restaurants, grocery stores, or any other businesses that deal with perishable agricultural products.

The burden is on the borrower/PACA debtor (as opposed to the beneficiary of the PACA trust) to establish that the subject assets (including inventory and accounts receivable) are not PACA trust assets. See Sanzone-Palmisano C. V. M. Seaman Enterprises, 986 F.2d 1010 (6th Cir. 1993) (finding that the PACA debtor had the burden of proving the assets producing the commingled proceeds were not produce or related assets and thus not subject to a PACA trust). In certain instances, a lender may be able to avail itself to the bona fide purchaser defense and thus avoid the “floating” PACA claims. However, case law in this area makes it …


Continue Reading →

A Hypothetical in Agricultural Lending — Meet Farmer Bob, AgBank and Massive Grain Elevator

Posted in Bank Lending, Commercial Lending, Commercial Loans and Leases, Community Banking, Lien Perfection, Ohio Law

In this hypothetical, we will consider the following circumstances.

  • “Farmer Bob” grows wheat (i.e., crops)
  • “AgBank” has loaned Farmer Bob money secured in part by his wheat
  • “Massive Grain Elevator” wants to purchase Farmer Bob’s wheat

Can Massive buy the wheat and not get the shaft from AgBank? It depends. In 1985 Congress passed the Food Security Act; the provision 7 U.S.C. Section 1961, titled Protection for Purchasers of Farm Products (FSA), constitutes a wholesale preemption of the Uniform Commercial Code (UCC). UCC Revised Article 9-320(a) provides that:

“a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, take free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.”

In addition, Official Comment 4 to 9-320(a) provides that:

“this section does not enable a buyer of farm products to take free of the security interest created by the seller … however, a buyer of farm products may take free of a security interest under Section 1324 of the Food Security Act of 1985, 7. U.S.C. Section 1631″

Meanwhile, FSA Section 1324 provides that notwithstanding Article 9 of the UCC, farm product buyers, commission merchants and selling agents (buyers in ordinary course) take free of security interests in farm products created by sellers unless one of two exceptions applies: 1) direct notice or 2) special central filing.…


Continue Reading →

What Goes Up … Quick Glance #3 at Ohio Oil and Gas Leases in Bankruptcy

Posted in Bankruptcy, Commercial Lending, Ohio Law

As with our prior posts on oil and gas leases in bankruptcy (located here and here), this post presents another thorny issue – namely, “Is an oil and gas lease a lease at all?”

Whether an oil and gas lease is a “lease” is significant in the bankruptcy context, because the Bankruptcy Code has several provisions regarding the treatment of leases.

This post considers two cases that interpret 11 U.S.C. § 365(d)(4), which provides that unless the bankruptcy court orders an extension, “an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by … the date that is 120 days after the date of the order for relief [(typically, the commencement of the case)]….” The Code further provides that “the rejection of an … unexpired lease of the debtor constitutes a breach of such contract or lease … immediately before the date of the filing of the petition.” …


Continue Reading →

What Goes Up…Quick Glance #2 at Ohio Oil and Gas Leases in Bankruptcy

Posted in Bankruptcy, Commercial Lending, Ohio Law

As Ohio enjoys its latest boom in oil and gas exploration, it is important to understand how oil and gas leases are treated in bankruptcy.  The importance of these issues are underscored by the frequency with which the courts confront them; hence we visit again this unsettled area and consider further the question of the ownership of unextracted oil and gas in a bankruptcy context.

In the recent case of In re Cassetto, 475 B.R. 874 (Bankr. N.D. Ohio 2012), a bankruptcy court for the Northern District of Ohio examined whether a bankruptcy trustee charged with administering the assets of an individual chapter 7 debtor could enter into an oil and gas lease despite the debtor’s objections, and, if so, whether the debtor’s homestead exemption would apply to the signing bonus for such lease.

The lease the trustee sought to enter into had a five year term and would permit the extraction of oil and gas in exchange for a $3,900 per acre signing bonus and royalties of 17.5% of the value of any oil and gas produced from the property.  The trustee sought to enter into the lease, receive the signing bonus and thereafter abandon the lease to the debtor such that the debtor would be entitled to any royalty payments under the lease.…


Continue Reading →

Financing in the Energy Sector: A Primer for Lenders

Posted in Commercial Lending

We hope you enjoyed the four-part series on energy financing that has run in the Banking & Finance Law Report blog during the past few weeks. We’ve compiled those articles into a resource that’s relevant to anyone involved with lending or borrowing in the energy sector. Be sure to download the Energy Financing eBook, and feel free to forward it to colleagues who also will be interested.…


Continue Reading →

10th District Court of Appeals Upholds Subordination and Flow Down Provisions in Commercial Construction Documents

Posted in Bank Litigation, Commercial Lending, Ohio Law, Real Estate

On March 29, 2013, the Court of Appeals for the 10th Appellate District in Columbus issued a decision of significance for mortgage lenders that rely on contractual subordination and flow down provisions in construction contracts. 

In KeyBank Natl. Assn. v. Southwest Greens of Ohio, L.L.C., 10th Dist. No. 11AP-920, 2013-Ohio-1243, the 10th District Court of Appeals upheld the September 14, 2011 decision by Judge John Bessey of the Franklin County, Ohio Common Pleas Court that the plaintiff lenders (the "Lenders") had priority over the subcontractors/ mechanic’s lien claimants even though the lenders recorded their mortgage subsequent to the notice of commencement’s recording.  The decision is significant because during this period fraught with contested foreclosures and inter-creditor disputes over priorities in real estate, the 10th District has affirmed Ohio’s broad construction and consistent enforcement of flow down provisions in construction documents.

In the spring of 2008, defendant Columbus Campus, LLC ("Campus") contracted with a general contractor to construct a continuing care retirement community on 88 acres in Hilliard, Ohio.  On March 10, 2008, Campus filed a notice of commencement; on April 16, 2008, the Lenders executed a $90 million construction loan agreement with Campus secured by a mortgage on the 88-acre property; the Lenders recorded their mortgage on April 22, 2008.  By March, 2009, the Lenders had disbursed approximately $45 million of the loan proceeds pursuant to various draw requests, $27 million of which was paid to the general contractor and various subcontractors.…


Continue Reading →

Due Diligence in Lending to the Oil and Gas Industry

Posted in Commercial Lending

Although Ohio lenders that finance companies in the oil and gas industry will encounter some of the same due diligence issues found in other industries, the oil and gas business is a world of its own. We advise our lending clients to conduct diligence in the oil and gas industry in the same manner as if they were buying the company, perhaps just not to the same degree, because lenders typically have some collateral to help them recover a portion of their investments from oil and gas customers that stumble. Nevertheless, lenders need to understand the world of oil and gas if they wish to avoid mistakes and prosper.

First, lenders must understand that the shale oil and gas revolution has inspired a new generation of entrepreneurs, some of whom are making their first foray into the oil patch. This entry will be difficult for companies with little or no experience or existing relationships. Even well-established oil and gas companies may know very little about the laws, regulations, and geology of Ohio. To properly evaluate risk, the lender’s first task is to learn about its prospective borrower. Does the prospective borrower have experience in the industry, with this particular play, in this state, or with a given technology, such as drilling horizontal wells? Do they understand the regulations applicable to their businesses? These are just a few of the critical questions lenders should ask.…


Continue Reading →

Perfecting Security Interests in Assets of Ohio Gas and Pipeline Companies

Posted in Commercial Lending, Ohio Law

With the recent boom in Ohio’s oil and gas industry, secured creditors in Ohio should be sensitive to special statutory requirements for perfecting security interests granted in assets of gas and pipeline companies.

Although security interests in personal property and fixtures are most frequently perfected by filing financing statements under the UCC, there are several types of security interests which require perfection through other channels.  In Ohio, pursuant to Section 1701.66 of the Revised Code, security interests in property of “public utilities” are among the interests that must be perfected by other means. “Public utility” is defined by the Ohio Revised Code Sections 4905.02 and 4905.03 to include, among others and with certain exceptions, (i) gas companies and natural gas companies, when engaged in the business of supplying artificial or natural gas, as applicable, for lighting, power, or heating purposes to consumers within Ohio and (ii) pipe-line companies, “when engaged in the business of transporting natural gas, oil or coal or its derivatives through pipes or tubing, either wholly or partly within [Ohio], but not when engaged in the business of the transport associated with gathering lines, raw natural gas liquids, or finished product natural gas liquids.” (Emphasis added).  Additional discussion about this distinction among pipeline companies follows.…


Continue Reading →

Ohio Passes Legislation Preventing Recovery on “Cherryland” Insolvency Carveouts in Nonrecourse Loans, Among Other Changes

Posted in Commercial Lending

Bankers and their counsel should note that during its December lame-duck session, the Ohio General Assembly passed the Ohio Legacy Trust Act (Am. Sub. H.B. 479), which will go into effect March 27, 2013.  The Act creates borrower-friendly provisions prohibiting the use of so-called “Cherryland” insolvency carve-outs in nonrecourse loan documents which will be of interest to all financial institutions engaged in commercial lending in Ohio.

“Cherryland” insolvency carve-outs are so named for the 2011 Michigan appellate case, Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership, in which the court upheld a widely-used provision in non-recourse loan documents that caused the loan at issue to become fully recourse to the guarantor upon the insolvency of the borrower.

The Cherryland Mall decision prompted the Michigan legislature to pass the Nonrecourse Mortgage Loan Act, which became effective in Michigan in March of 2012. In order to legislatively overturn the Cherryland Mall decision, the Nonrecourse Mortgage Loan Act provides that a post-closing solvency covenant cannot be used as a nonrecourse carve-out or as the basis for any claim or action against a borrower or guarantor on a nonrecourse loan. It also provides that any provision purporting to create such a carveout is invalid and unenforceable.

"Post-closing solvency covenant" is defined in both Michigan’s Nonrecourse Mortgage Loan Act and the Ohio Legacy Trust Act to mean "any provision of the loan documents for a nonrecourse loan, whether expressed as a covenant, representation, warranty, or default, that relates solely to the solvency of …


Continue Reading →

Health Care Lending: In re Altercare of Stow Rehabilitation Center

Posted in Bank Lending, Commercial Lending, Commercial Loans and Leases, Health Care Lending

 

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.…


Continue Reading →

Post-Judgment Remedies

Posted in Bank Lending, Commercial Lending

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


Continue Reading →

What to Consider When Non-Payment Leads to Litigation

Posted in Bank Lending, Commercial Lending

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.…


Continue Reading →

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

Continue Reading →

Structuring Sales to Ensure Payment

Posted in Commercial Lending

This article is Part One in a seven-part series on how to structure sales and what to do when your customer fails to pay you. 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. 

Know Your Customer

Before entering into a transaction, obtain the following information and documents that will 

help you determine if this is someone with whom you want to do business, and will help you set

the terms under which you want to do business.  It will also assist in the event collection of a

debt is necessary.

 

1. Financial statements, including an income statement, a cash flow statement and a balance

 sheet. 

2. Dun & Bradstreet- this is a subscriber service that rates businesses.  

3. Trade references – these are references from other businesses with which your potential

customer does business.

4. Bank references- find out where your potential customer banks.  

 

 …


Continue Reading →

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

Posted in Commercial Lending

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 …


Continue Reading →

JNT Properties v. Keybank: Ambiguity In The Calculation Of Interest

Posted in Commercial Lending

On June 30, 2011, the Eighth District Court of Appeals in Cuyahoga County, Ohio decided the case of JNT Properties, LLC v. KeyBank, Nat’l Assoc., which dealt with the calculation of interest on a commercial loan by what is known as the “365/360 method.” The court held that KeyBank’s interest calculation method for the loan was unintelligible because although a provision toward the top of the note contained a stated annual interest rate of a certain percentage, that provision was contradicted by another term in the note relating to calculation of interest.  Accordingly, lenders using the common “365/360 method” should ensure that their loan documents clearly and intelligibly describe the calculation of interest.

The case originated when JNT Properties filed a class action against KeyBank, alleging breach of contract based on KeyBank’s use of the “365/360 method” for the calculation of interest. The promissory note in question stated that the “Initial Interest Rate” was 8.93%, but then elsewhere in the document stated as follows:…


Continue Reading →