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

Posted on May 2, 2013 by Brad Hughes

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.

The three noteworthy lending cases that the Ohio Supreme Court accepted on April 24 reflect three distinctly different ways that the Supreme Court resolves questions of significance to our readers: (1) certified-conflict cases, in which one of Ohio’s appellate district courts certifies that its decision conflicts with that of one or more other appellate districts; (2) certified-question cases, in which a federal court asks the Supreme Court to answer a question of Ohio law for which there is no controlling precedent; and (3) discretionary appeals, in which the Supreme Court agrees to resolve a question of public or great general interest.

FirstMerit Bank, N.A. v. Inks

In the certified-conflict case, FirstMerit Bank, N.A. v. Inks, Supreme Court Case No. 2013-0091, the Supreme Court has determined that a conflict exists among Ohio’s appellate districts about whether the Statute of Frauds bars a foreclosure defendant from asserting an oral forbearance agreement as a defense.  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 reversed the trial court’s decision on the Statute of Frauds, saying:

By its plain language, the [Statute of Frauds] prohibits a party from “bringing an action on a loan agreement” unless the agreement is in writing. In this case, the Slymans and Inkses did not attempt to “bring an action” against FirstMerit, they merely raised the oral forbearance agreement as a defense to FirstMerit’s action against them.

FirstMerit asked the Ninth District to certify a conflict between its decision and that of multiple other appellate districts, and the Ninth District agreed that its judgment conflicted with that of Ohio’s Tenth District Court of Appeals more than a decade ago in Nicolozakes v. Deryk Babrield Tangeman Irrevocable Trust, 10th Dist. No. 00AP-7, 2000 WL 1877521 (Dec. 26, 2000). In Nicolozakes, the Tenth District held that the Statute of Frauds barred Ms. Tangeman from defending against a foreclosure action by alleging that Mr. Nicolozakes had orally released her from a note and mortgage. 

If you are interested in following the FirstMerit case to see how the Ohio Supreme Court resolves this conflict about oral forbearance agreements, please stay tuned to the Banking & Finance Law Report. You can also receive e-mail updates about filings in the case directly from the Ohio Supreme Court by registering at this link. And the FirstMerit docket filings are publicly available here. 

Corbett v. Beneficial Ohio, Inc.

In the certified-question case, Corbett v. Beneficial Ohio, Inc., Supreme Court Case No. 2013-0213, Beneficial Mortgage Co. is the assignee of a mortgage with Mr. Corbett. A scrivener’s error during the loan process caused the loan to be secured by Corbett’s house rather than his six-unit apartment building, as the parties intended. Corbett obtained Rule 60(B) relief in the foreclosure proceeding on this basis, the foreclosure action was dismissed, and Beneficial took no further action to collect or foreclose. Even so, Corbett sued Beneficial in a multi-count complaint sounding in fraud, attempted theft, violations of the Consumer Sales/Fair Debt Collection Practices Acts, and a separate cause of action for “wrongful attempted foreclosure.” After the case was removed to federal court, the U.S. District Court for the Southern District of Ohio sua sponte certified two questions to the Ohio Supreme Court, which the Supreme Court has now agreed to resolve: 

(1) Does Ohio recognize a freestanding cause of action for “wrongful attempted foreclosure?”

(2)  If so, what are the elements of such a claim, and what damages are available? 

Papers filed on the Corbett docket, available here, assert that only three states currently recognize a separate cause of action for wrongful attempted foreclosure, including Georgia, North Carolina, and Massachusetts. Stay tuned to the Banking & Finance Law Report to see where the Ohio Supreme Court comes down on this question.

Ohio Neighborhood Fin., Inc., d/b/a Cashland v. Scott

The payday lending case, like the FirstMerit case described above, comes from Ohio’s Ninth District Court of Appeals, and has garnered some attention from the press, such as this article from the Cleveland Plain Dealer. In Ohio Neighborhood Fin. Inc. v. Scott,Supreme Court Case No. 2013-0103, the dispute concerns a $500 loan that Cashland made to Rodney Scott back in 2008. The Customer Agreement that Scott signed established a “one payment” schedule, under which Scott would repay Cashland $545.16 just two weeks later. When the loan was not repaid, Cashland sued, arguing that, as a registered lender under the Ohio Mortgage Loan Act (“MLA”) (R.C. 1321.51 et seq.), it was entitled to a judgment of $570.16, along with 25% yearly interest. The trial court and Ninth District Court of Appeals, however, agreed that Cashland had issued a loan not permitted by the MLA, and that by invoking the MLA, Cashland was attempting an end-run around Ohio’s 2008 Short-Term Lender Law (R.C. 1321.35 et seq.), which caps total loan amounts at $500, requires the duration of the loan to be not less than 31 days, and prohibits registrants from charging interest rates higher than 28% or additional fees (such as loan initiation fees). As the Ninth District explained in its majority opinion:

Cashland argues that, as a registrant under the [MLA], it was permitted to issue the loan in this case because the [MLA] permits single-payment loans. However, to construe [the statutes] in the manner Cashland suggests would permit the registrants under the [MLA] to issue the payday loans that the Short-Term Lender Law seeks to regulate. Cashland suggests that the General Assembly intended to allow lenders to choose between the Short-Term Lender Law and the [MLA]. If true, however, no payday lender will ever register under the Short-Term Lender Law, and payday-loan lenders would be allowed to issue loans in greater amounts and shorter durations than allowed by the Short-Term Lender Law, all the while charging fees prohibited by the Short-Term Lender Law. *** The effect would be to nullify the very legislation that is designed to regulate payday-type loans – a result at odds with the intent of the General Assembly.

Ohio Neighborhood Fin. Inc. v. Scott, 2012-Ohio-5566, ¶ 11. Dissenting, Judge Dickinson opined that “the majority has suggested that the General Assembly intended the Short-Term Lender Act to regulate this type of loan. Regardless of the intent of the General Assembly in [enacting] the Short-Term Lender Act, nothing in [that Act] prohibits a loan under the [MLA] that satisfies the requirements of the Mortgage Loan Act.” Id. at ¶ 24. 

The Supreme Court has now agreed to hear Cashland’s discretionary appeal by a vote of 5-2. Notably, the retired Deputy Superintendent and Chief Examiner of the Department of Commerce’s Division of Financial Institutions filed an amicus brief urging the Court to take the case, contending that the Ninth District’s decision “threatens to overthrow Ohio’s consistent interpretation and enforcement of the MLA based on nothing more than an erroneous reading of the statute.”

As these recently accepted cases demonstrate, 2013 promises to be a meaningful year for lenders before the Ohio Supreme Court. If your organization would like to chime in on the merits of any of the foregoing cases, remember that the Court’s Rules of Practice permit participation by amici curiae, and that having your voices heard in a court of last resort on issues critical to your business can be every bit as meaningful as lobbying to be heard in the General Assembly. 
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Ohio Supreme Court Frowns On Constructive Notice Via Website Of Sheriff's Sale

Posted on September 6, 2012 by Brad Hughes

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 Rules On The Enforcement Of Non-Compete Agreements By The Surviving Company In A Merger

Posted on May 30, 2012 by Kevin Griffith

The Ohio Supreme Court ruled 4-3 on May 24, 2012, that following a merger the surviving company may not be able to enforce employees’ non-compete agreements where the agreements fail to contain an assignment clause and the time period of the employees’ non-competes began to run as of the date of the merger.

In Acordia of Ohio, L.L.C. v. Fishel et al., the Ohio Supreme Court ruled that a merger causes the original corporate party to non-compete agreements to cease to exist, while the surviving company takes ownership of the agreements. But where the non-compete agreement fails to contain an assignment clause, the surviving company may not enforce the non-compete agreement as if it “stepped into the shoes” of the company that had originally contracted with the employees. Although the employees’ non-compete agreements transferred automatically by operation of law to the surviving company, the Ohio Supreme Court held that the non-compete agreements at issue provided only that the employees would avoid competition following their termination from the specific company identified in the non-compete agreements. Because the non-compete agreements did not state they could be assigned or would carry over to a successor, the Ohio Supreme Court ruled that the named parties intended the agreements to operate only between themselves — the employees and the specific employer. According to the Acordia decision, the termination of the employees’ employment with the original company was triggered by the merger, which commenced the running of the non-compete periods. These periods expired on their own terms after two years of employment with the successor — Acordia — and thereby made the non-compete agreements unenforceable by Acordia when the employees later joined a competitor.

 The dissenting opinion in Acordia noted that the lead opinion runs counter to Ohio’s century-old precedent that in a merger, the consolidated party steps into the shoes of the constituent companies and that by operation of law, and in the absence of explicit contract language to the contrary, the surviving entity is vested with all the assets and obligations of the constituent entities. Those assets and liabilities historically have included agreements such as noncompete agreements and the ability to enforce them as if the surviving entity were a signatory to them.

Recommendations

It is too early to know the reach and impact of this ruling, but we can foresee that Acordia’s analysis might be applied by Ohio courts to contracts other than non-compete agreements. Therefore, at a minimum, Acordia serves as a reminder to contracting parties to be mindful of the importance of considering the portfolio of contracts in place at a company involved in a merger.

Clients are cautioned to examine all of their agreements governed by Ohio law with respect to provisions that may be viewed as triggering a termination or dealing with an assignment by operation of law in the context of a merger to assure that the Acordia decision is followed. In order to assure that an agreement is fully transferred by a merger and that a surviving company may enforce the agreement on the same terms as the original corporate party, we recommend clients assure agreements do not restrict the “company” only to the original corporate party but that the term specifically includes the original corporate party’s “successors and assigns.”

Specifically with respect to non-compete agreements, we recommend clients review the language to assure it includes an appropriate assignment clause so that the commencement of a non-compete period is not triggered by a merger in which the original party to the agreement is not the surviving entity.

Acquiring companies’ due diligence investigations on potential Ohio target companies will need to include a review of all business agreements to determine if Ohio law governs and to assure that the surviving entity in a merger is assuming full rights and responsibilities for all obligations of the constituent entity, including enforcement of such agreements on the same terms as the original corporate party.

For more information contact:

James D. Curphey

614.227.2047

jcurphey@porterwright.com

 

Mark B. Koogler

614.227.2133

mkoogler@porterwright.com

 

Fred G. Pressley, Jr.

614.227.2233

fpressley@porterwright.com
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Ohio Supreme Court to Hear Oral Arguments Regarding Adequacy of "Website Notice" of Sheriff Sales

Posted on May 17, 2012 by Brad Hughes

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 the property at the sale, it did not receive notice by mail of the sale, and the property sold for an amount substantially less than the debt owed to PHH and far below what it intended to bid.

The Clermont County Court of Appeals determined that counsel for PHH was notified that he would need to check the sheriff’s website for future sale dates, and that “notice by website is, at the very least, equally reliable to notice by mail.” The court of appeals thus concluded that the requirements of due process and Central Trust had been satisfied and refused to set aside the sale.

PHH contends that the court of appeals’ decision effectively overturns Central Trust and approves a method of notice – what PHH calls “constructive notice by website” – that is more akin to notice by publication, rather than actual notice. PHH also notes that the General Assembly amended R.C. 2329.26 and .27 after Central Trust to require that written notice of the date, time, and place of an execution sale be given to parties in a foreclosure action.

The appeal has attracted the participation of several Legal Aid organizations across the State who have aligned themselves with PHH and contend that “constructive internet notice” is not “equally reliable” as actual written notice, given that many Ohioans in rural and low-income communities have limited access to the Internet. Stay tuned to this blog for updates on the decision in this appeal.

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Mayer v. Medancic: Is Interest in Ohio as Simple (or Compound) as it Seems?

Posted on January 15, 2010 by Ken Rathburn

On December 3, 2009, the Supreme Court of Ohio decided the case of Mayer et al. v. Medancic et al., in an effort to clarify the calculation of interest on an obligation upon the occurrence of a default. As stated by the Court, “compound interest is not available upon a default on a written instrument absent agreement of the parties or another statutory provision expressly authorizing it.” Accordingly, lenders should ensure that their loan documents clearly state that interest will be compounded not only during the term of the loan, but also after default.

The case involved the calculation of default interest on three promissory notes executed and delivered by the Medancics to the Mayers. All principal and accrued interest on each note was due and payable at maturity and the Medancics failed to make those payments in each case. Although the maturity dates fell in 1995 and 1997, the Mayers did not receive judgment on the notes until May of 2006. The Mayers contended that they were entitled to post-judgment interest at the rates set forth in the notes, compounded annually, but the trial court held that the Mayers were entitled to post-judgment simple interest at the rates set forth in the notes. The Eleventh District Court of Appeals reversed, on the basis of the Supreme Court of Ohio case, State ex rel Bruml v. Brooklyn, which the Eleventh District held provided for “interest upon interest” and, therefore, provided for compound default interest. In doing so, the Eleventh District acknowledged the general rule that compound interest is not available absent a statutory provision or agreement of the parties, but found that the rule applied only to cases decided under Ohio Revised Code 1343.03.

 

The Supreme Court of Ohio disagreed. The Court evaluated both statutes: Ohio Revised Code 1343.02 and 1343.03. 1343.02 provides that “upon all judgments, decrees, or orders, rendered on any bond, bill, note, or other instrument of writing containing stipulations for the payment of interest in accordance with section 1343.01 of the Revised Code, interest shall be computed until payment is made at the rate specified in such instrument.” 1343.03 sets forth the applicable statutory rate of interest when the instrument does not specify the interest rate. The Court made two crucial findings: (1) it saw no reason to withhold application of the general rule to cases decided under 1343.02, despite its historic application to cases decided under 1343.03, and (2) Bruml v. Brooklyn allowed for only “interest upon interest,” which it distinguished from compound interest. “Bruml merely permits the collection of interest on an amount that is due and payable, but not paid, even if that amount includes previously earned interest.” According to the Court, this meant that Bruml provides for the collection of simple interest on the judgment, whether that judgment amount included unpaid interest or solely principal was irrelevant.

 

Ultimately, this decision takes a middle position between that urged by the Mayers and that urged by the Medancics. Because the payment at maturity on each note included both principal and accrued interest, the default interest would be on that entire missed payment amount, but would be simple interest instead of compounded annually. Still, the decision is a costly one for the Mayers who lost compound interest over a nearly ten year period. This case should serve as a warning to all lenders in Ohio. Even if the instrument fully describes the accrual and calculation of interest during the term of the obligation, it must also do so for the period following a default.

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