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Banking & Finance Law Report

Category Archives: Real Estate

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Does your construction mortgage really protect you from mechanic’s liens?

Posted in Bank Lending, Lien Perfection, Other Articles, Real Estate

If you are a lender/mortgagee and your borrower/mortgagor is adding more real property collateral to the mortgage (in Ohio), how do you retain your first priority position in all mortgaged property while adding that property to the mortgage? This question is especially relevant when the borrower is assembling property as part of a development. The answer may not be as simple as you think.

You could do an amended and restated mortgage, but that could be construed as replacing the original mortgage, which would cause the priority of the mortgage to be changed from the recording date of the original mortgage to the recording date the amended and restated mortgage. So, instead you could record an amendment or modification which adds property to the mortgage. Naturally you would include a provision that states that all of the original mortgage provisions continue in full force and effect. That should do it, right? Well, recently one Ohio Court said “no.”

In 2003, Bridgeview Crossing LLC (“BC”) began assembling properties for a commercial development. In 2006 BC signed a $24,000,000 Cognovit Note and granted an open-end construction mortgage (the “Original Mortgage”) in favor of its lender (the “Mortgagee”). There was evidence that Panzica Construction Company (“Panzica”) had done some work before the mortgage was recorded (and before the Notice of Commencement was recorded).

Normally, a subsequently filed mechanics lien for work done before the Original Mortgage was filed would have priority over the mortgage. (See Ohio Revised Code § 1311.13.) However, the Original …


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Ohio Foreclosure Procedure . . . Twice the Appeal

Posted in Collection and Foreclosure, Ohio Law, Real Estate

Earlier this month the Supreme Court of Ohio resolved a split of authority between the Fifth District and Seventh District regarding whether a foreclosure decree is a final appealable order when it includes unspecified amounts advanced by the mortgagee for inspections, appraisals, property protection and the like. Prior to the May 15 decision in CitiMortgage, Inc. v. Roznowski1, it was unclear whether a judgment decree of foreclosure – which typically includes unspecified amounts that may be advanced by the mortgagee prior to confirmation of the foreclosure sale for inspections, appraisals, property protection and maintenance – is a final appealable order, or whether a foreclosure defendant must wait until after the property has been sold at sheriff’s sale and the order of confirmation of sale issued before he or she may appeal.

The Supreme Court of Ohio’s decision in the CitiMortgage case establishes that there are two separate opportunities for appeal. The first opportunity arises after the trial court issues a judgment decree of foreclosure. The Court found that as long as the foreclosure decree addresses the rights of all lienholders and the responsibilities of the mortgagor – regardless whether all exact amounts for which the mortgagor is liable are set forth in the judgment order, such as interest and protective advances made or to be made by the mortgagee – the foreclosure decree constitutes a final appealable order. A party appealing a foreclosure decree may challenge “the court’s decision to grant the decree of foreclosure” and once that …


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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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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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Ohio’s 10th Appellate District Finds Debtor Lacks Standing to Challenge Assignee’s Power to Enforce Loan Documents

Posted in Real Estate

In a decision that will hearten commercial lawyers, on April 23, 2013, Ohio’s Court of Appeals for the Tenth Appellate District relied on lack of standing to reject a mortgagor’s attempt to avoid the consequences of his undisputed payment default by accusing the mortgagee, which was the assignee of his note mortgage, of lacking standing and using robo-signers. See Deutsch Bank National Trust Company, as Trustee for Argent Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2006-M1 c/o American Home Mortgaging Servicing, Inc. v. John Whiteman, 10th Dist. No. 12 AP-536, 2013-Ohio-1636.  In so doing, the court followed other Ohio state and federal courts in holding that a debtor/ mortgagor lacks standing to challenge the validity of assignments from the original creditor/ mortgagee.

Plaintiff Deutsch Bank National Trust Company, as Trustee for Argent Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2006-M1 c/o American Home Mortgaging Servicing, Inc. (the "Bank") was the assignee of a note and mortgage from John Whiteman ("Whiteman") to Argent Mortgage Company, LLC ("Argent"). Five years after the note and mortgage were assigned to the Bank, Whiteman defaulted in payment on the note securing the mortgage and the Bank filed a foreclosure action against him.…


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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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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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Ohio property data to remain free online

Posted in Real Estate

Put your wallet away and hit print as many times as you like. Because for now, there will be no new charge to download or print property records in Ohio.

As a welcomed early holiday gift, the proposal to charge fees for property records has died in committee. The office of Senate Judiciary Committee chair Senator Mark Wagoner announced last week that the Ohio Recorders’ Association proposal to authorize county offices to charge for downloading or printing public records from their government-funded websites will not be part of House Bill 247, which is pending before the Judiciary Committee.…


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Ohio Supreme Court Foreclosure Decision

Posted in Real Estate

On Halloween, the Supreme Court of Ohio issued a ruling that should scare lenders who do not do their own due diligence before filing a foreclosure action, particularly with respect to loans pooled into mortgage-backed securities, or that have otherwise been assigned one or more times from the originator of the loan.

The Court, in Federal Home Loan Mortgage Corporate v. Schwartzwald, 2012-Ohio-5017, found that Freddie Mac had no standing to commence a foreclosure action against the debtors’ property because Freddie Mac did not hold the note at the time its complaint was filed, despite the fact that it became the holder of the note by the time the Court considered the case.  Basing its decision on U.S. Supreme Court precedent, as well as similar decisions in other jurisdictions, the Supreme Court of Ohio ruled that standing is determined as of the time the complaint is filed, without regard to subsequent events. Consequently, Freddie Mac’s complaint was dismissed, with leave to refile the complaint at a later time.

What the Schwartzwald case means for lenders is potentially significant delays in obtaining judgment against debtors because although a lender may refile a complaint once it holds the note, the original suit must first be dismissed and the entire process must begin anew. Furthermore, refiling is expensive because it means paying court fees and legal counsel twice.  Luckily, a lender can avoid these pitfalls by making sure it actually holds the note and mortgage prior to filing a complaint seeking judgment on that …


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Ohio Supreme Court Frowns On Constructive Notice Via Website Of Sheriff’s Sale

Posted in Real Estate

On May 17, 2012, this blog reported on the oral arguments in PHH Mortgage v. Prater, a case from Clermont County, Ohio regarding the extent to which an internet website may (or may not) be constitutionally adequate notice of a sheriff’s sale.

Yesterday, the Ohio Supreme Court issued a unanimous opinion in favor of the mortgage company, reversing the court of appeals and holding that “constructive notice by publication to a party with a property interest in a foreclosure proceeding via a sheriff’s office website is insufficient to constitute due process when that party’s address is known or easily ascertainable.”

The Court’s opinion, authored by Justice Evelyn Lundberg-Stratton (who will retire at the end of this year), discusses precedent from the U.S. Supreme Court (Mullane and Mennonite Bd. of Missions) and the Ohio Supreme Court (Central Trust Co.), as well as more recent authority from the United States District Court for the Eastern District of Michigan (McCluskey v. Belford High School, E.D. Mich. No. 2:09-14345, 2010 WL 2696599 [June 24, 2009]) to conclude that the sheriff’s internet notice procedure impermissibly “shifts the burden of notification from the sheriff’s office to the persons to whom the notice is directed. *** While we understand the interest in using technology to conserve resources, we find that notice by Internet posting is more akin to publication in a newspaper, and due process demands more in this instance.” PHH Mortgage, 2012-Ohio-3931, ¶ 16.…


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Ohio Supreme Court to Hear Oral Arguments Regarding Adequacy of “Website Notice” of Sheriff Sales

Posted in Real Estate

On May 23, the Ohio Supreme Court will hear oral arguments in an appeal by PHH Mortgage Corporation that concerns whether a sheriff’s website can provide constitutionally sufficient notice of the date, time, and location of a sheriff’s sale of foreclosed property. Real estate lenders of all sorts will be interested in the outcome which has important implications for foreclosure proceedings.

Nearly two decades ago, in Central Trust Co. v. Jensen, 67 Ohio St.3d 140 (1993), the Supreme Court held that notice by mail or other “equally reliable” means is a constitutional prerequisite to a proceeding that adversely affects a party’s property interests, when the interest holder’s address is known or easily ascertainable. The PHH Mortgage Corp. case tests that principle in the Internet age.

In PHH Mortgage, the mortgage company (“PHH”) filed a foreclosure action in April 2008, and the trial court’s final judgment in favor of the company was entered the following September. The property was then to be sold through the Clermont County Sheriff’s Office. On three occasions in 2009, the order of sale was withdrawn. On each of these occasions, PHH was notified by mail of the date and time for the sale. The trial court scheduled a fourth sale for April 2010. But PHH did not receive notice by mail of this sale, because at some point before then the sheriff’s office (due to budget constraints) had stopped sending notice by mail of upcoming sales, and began publishing the sale dates on its website. So, even though PHH intended to bid on …


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Obtaining Property Tax Relief in Ohio

Posted in Real Estate, Tax Law

The real estate market in Ohio continues to face significant challenges. With many property values declining throughout the state, challenging property tax assessments to obtain tax relief is an important strategy for financial institutions to consider.

How does the complaint process work?
Property taxes in Ohio are paid in "arrears," meaning taxes paid in 2011 are for tax year 2010. By March 31, 2011, a property owner can file a complaint with the Board of Revision in the county in which the property is located to challenge the assessed value of the property for tax year 2010.

The complaint must include certain information including the current assessed value of the property as well as the owner’s opinion of the correct value as of January 1, 2010. The taxpayer will be given a hearing with the Board of Revision, at which the taxpayer can argue for a lower value and at which the local school district may argue to retain the current valuation. An appraisal by a qualified appraiser that supports the taxpayer’s opinion of value is generally suggested for commercial and industrial property.

Value of controlling property taxes
Real property taxes are often a significant non-productive expense of property owners. A successful challenge filed by March 31, 2011 for the tax year assured the taxpayer a lower assessment for at least one year and potentially additional years. Generally, because only one complaint per property may be filed within each three-year period, property owners should consider the best time to file …


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