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Banking & Finance Law Report

Category Archives: Ohio Law

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PWMA Briefing on Appellate Practice

Posted in Litigation, Ohio Law, Other Articles, PWMA Practice

From time to time we like to pass along educational opportunities that may be of interest to our subscribers. I am including details on an upcoming event that members of our Appellate and Supreme Court Practice are offering on the benefits of amicus advocacy before the Ohio Supreme Court.

Too often, the Ohio Supreme Court decides issues that affect an industry statewide without first having heard from the industry itself. Trade associations and companies can fill this gap by filing “friend of the court” briefs in Supreme Court cases that affect them. To learn more about how your organization can be part of this process, please join Kathleen Trafford, Brad Hughes, and Dennis Hirsch of our Appellate Practice Group on April 8, 2014 for a breakfast briefing. Using a roundtable format, they plan to cover the benefits of amicus advocacy, strategies for effective amicus advocacy, and the rules governing “friend of the court” briefs.

REGISTER NOW

Schedule:

Tuesday, April 8, 2014
7:30 a.m. – 8 a.m.
Registration and breakfast
8 a.m. – 9 a.m.
Roundtable discussion

Location:

Porter Wright
41 S. High St., 29th Floor
Columbus, OH 43215

 …


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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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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 …


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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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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 …


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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.…


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Lending License Required for Real Estate Commission Financing

Posted in Ohio Law, Regulation and Compliance

In a triumph of substance over form, on August 22, 2013, the Tenth Appellate District Court of Appeals disregarding self-serving labels and further clarified the distinction between a loan and a sale of accounts receivable in Fenway Financial, LLC dba Commission Express v. Greater Columbus Realty, LLC dba Keller Williams Greater Columbus Realty, LLC, No. 12AP-291. To cut to the chase, the Court found that regardless of the buzz words used, leaving the seller of an account receivable with the risk of collectability is a key factor in characterizing a transaction as a loan, not as a sale, and may implicate state loan licensing requirements and other statutes, including provisions dealing with the scope of UCC Article 9.…


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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.” …


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Ohio Legacy Trusts

Posted in Ohio Law

Ohio is now one of a number of states with a so-called “asset protection” statute. Bankers with trust authority might view this development favorably because it may be another possible service line, and indeed Ohio trust companies and Ohio trust lawyers were the main proponents of the statute.  Other bankers however, may encounter the statue as a roadblock in their collection efforts, to their dismay. The new statute was effective March 27, 2013.

Essentially, the statue creates another way to attempt to shield assets from creditor claims. Traditional spendthrift trusts provide such a shield, as does the incorporation of a business or the formation of a limited liability company. There are continuing questions about the effectiveness of asset protection trust statutes like the Ohio Legacy Trust Act. More on this later.

Here is a summary of how the statute works.  A person referred to as the “transferor” transfers assets in what the statute calls “qualified dispositions” to an irrevocable trust and, indeed the point of the statute, is that the transferor can still benefit from those assets through actions of a “qualified trustee,” which must be an Ohio trust company. A benefit might be, for example, a transfer annually of a portion of the trust. In short, the statute spells out what rights the transferor may retain in the trust and what authority a trustee can have under the trust instrument to honor those rights.…


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A Certified Question About “Wrongful Attempted Foreclosure” Likely To Be Left Unanswered For Now

Posted in Ohio Law

On May 2, we reported here on a trifecta of noteworthy lending cases that were accepted for review by the Ohio Supreme Court.  One of the three cases discussed in that post, Corbett v. Beneficial Ohio, Inc., is a certified-question case from the U.S. District Court for the Southern District of Ohio, in which District Judge Rice asked the Ohio Supreme Court whether the State of Ohio recognized a cause of action for “wrongful attempted foreclosure” and, if so, what the elements of such a tort are.  Last week, however, the parties to the underlying federal case filed a joint motion in the Ohio Supreme Court, asking that the certified question be withdrawn due to settlement and Rule 41(a) dismissal of the federal suit.  Given this development, and the fact that the Supreme Court answers certified questions that “may be determinative of the [federal] proceeding,” S.Ct.Prac.R. 18.1, the status of this tort in Ohio is likely to remain an open question for the time being.  Stay tuned to the Banking & Finance Law Report for any further developments.…


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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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An Ohio Supreme Court “Trifecta” of Noteworthy Lending Cases on the Docket

Posted in Ohio Law

At the end of April, the Ohio Supreme Court agreed to hear three notable cases that readers of this blog may wish to monitor – or perhaps even participate in as amici curiae. First, the Court has agreed to resolve a conflict among Ohio’s appellate districts regarding whether the Statute of Frauds precludes a foreclosure defendant from asserting an oral forbearance agreement as a defense. Next, the Court has agreed to answer a question certified from federal court as to whether Ohio recognizes the tort of “wrongful attempted foreclosure.” Third, the Court has agreed to hear a payday-lending case that has attracted media attention, concerning the interplay between Ohio’s Mortgage Lending Act and the more recent Short-Term Lender Law. For additional information about these three cases, read more here.…


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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.…


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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.…


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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.…


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The Mystery of Mineral Rights: A Lesson for Lenders

Posted in Ohio Law, Real Estate

By now, you have probably heard about some of the changes in title policies and title searches caused by the recent oil and gas activity in Ohio.  Title insurers also recently added to their policies a standard exception for any “lease, grant, exception or reservation of minerals or mineral rights.”

Essentially, this language means that any separate mineral interest created at any point in time by any party is now an exception to the title insurance policy, regardless of whether it is expressly disclosed.  In other words, there will be no coverage offered whatsoever if one of those interests negatively impacts the property in the future, even if it was not specifically disclosed in the policy.  And because title insurers will not insure against oil and gas interests, there isn’t much incentive for them to include such interests as exceptions in their title searches, especially when the cost of obtaining such information can be staggering.…


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Supreme Court Rules of Superintendence on Commercial Dockets

Posted in Ohio Law

The pilot program for commercial docket courts in Ohio began in 2009, and was met with strongly positive reviews by both business lawyers and their clients, who generally experienced prompter resolution of and greater expertise in commercial cases.  It now appears that what began as a pilot program will become permanent. 

In late 2012, the Supreme Court Task Force on Commercial Dockets issued a final report in which it recommended the Supreme Court adopt Rules 49 through 49.12 of the Rules of Superintendence for the Courts of Ohio allowing for the permanent establishment of commercial dockets.  The report found that the benefits of the program included accelerating decisions, creating expertise among judges, and achieving consistency in court decisions around the state, and it expected that these rules will be made permanent.  These rules provide in part for the following:

Expansion of the Commercial Docket Program- the Rules expand the commercial docket to counties with either 6 or more general division judges or populations exceeding 300,000, although implementation of the commercial docket program remains voluntary.

More Formalized Training- while the Temporary Rules require unspecified training of commercial docket judges through the Supreme Court of Ohio Judicial College, permanent Rule 49.04(B) requires at least 12 hours of training every two years.

Balancing of Workloads- New Rule 49.09(A) represents an attempt to balance the workload of commercial docket judges and non-commercial docket judges by assigning a non-commercial docket case to a non-commercial docket judge for every commercial docket case assigned. …


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President Signs Bill Protecting Privileged Information Submitted to the CFPB

Posted in Ohio Law

Banks and consumers concerned about waiving attorney-client privilege can now rest easy when submitting privileged information to the Consumer Financial Protection Bureau (CFPB). Congress recently passed legislation confirming such submissions will not waive privileged status as to third parties, consistent with existing law with respect to submissions to other federal banking agencies.

On December 20, 2012, President Obama signed H.R. 4014, protecting privileged information submitted to the CFPB, a federal supervisory entity created by the Dodd-Frank Act of 2010. The bill was passed by the House in March and by the Senate in December, and was strongly supported by the American Bar Association, numerous state bar associations, and the U.S. Chamber of Commerce.

H.R. 4014 clarifies that when financial institutions and other entities supervised by the CFPB submit privileged information, they do not waive attorney-client privilege as to third parties, and the CFPB can share such information with other federal agencies without affecting its privileged status. Although provisions protecting privileged information submitted by banks to other supervisory agencies, such as the FDIC and Federal Reserve Board, have previously existed, the Dodd-Frank Act did not clearly specify whether these provisions would apply to information submitted to the CFPB as well. The passage of H.R. 4014 creates a uniform standard for treatment of privileged information submitted to any federal banking agency.

This development should reassure and encourage banks and consumers to seek legal advice when dealing with the CFPB without the worry that attorney-client privilege will be waived.…


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Ohio General Assembly Amends Statutory Attorney-Client Privilege

Posted in Ohio Law

Financial institutions’ lawyers working in Ohio (and their clients) should take note of an important development regarding the law of attorney-client privilege. On December 20, 2012, Governor John Kasich signed into law Amended Substitute House Bill 461, which makes important changes to Ohio’s attorney-client privilege statute, R.C. 2317.02(A)(1). 

Until recently, Ohio’s attorney-client privilege statute stated that the attorney-client privilege would prevent an attorney from testifying in deposition or at trial except "by express consent of the client or, * * * if the client voluntarily testifies, * * * the attorney may be compelled to testify on the same subject."  (Emphasis added.)  This language gave rise to two, somewhat controversial principles of Ohio privilege law. 

First, the Supreme Court of Ohio has held for over 150 years that the statutory privilege is waived whenever a client "voluntarily testifies" – not just when the client voluntarily testifies about the substance of a privileged attorney-client communication.  Although few Ohio lawyers were aware of this line of precedent, it had been followed several times in Ohio’s appellate courts and as recently as 2008.  Second, the Supreme Court of Ohio has held repeatedly that "R.C. 2317.02(A) provides the exclusive means by which privileged communications directly between an attorney and a client can be waived."  Thus, the Court has held that the statutory attorney-client privilege would not be waived "even when the client has told a third person what was discussed."  Both of these holdings are contrary to common sense and …


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