Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

When Whiteman failed to answer the complaint, the Bank obtained a default judgment and scheduled a sheriff's sale.  Before the sale was held, Whiteman filed a motion for relief from the default judgment under Ohio Civil Rule 60(B); the motion was granted in no small part because Whiteman did not serve the motion on the Bank. After Whiteman notified the court that he had not served the motion on the Bank, the Bank successfully moved to vacate the order granting Whiteman's 60(B) motion, which was then fully briefed and denied without a hearing, as was Whiteman's motion to dismiss under Ohio Civil Rule 12(B)(1).

On appeal, Whiteman asserted that the trial court abused its discretion in denying his 60(B) motion without a hearing and erred in denying his 12(B)(1) motion to dismiss because there was no justiciable controversy between himself and the Bank.

The Tenth Appellate District rejected both assignments of error. Whiteman alleged that his "meritorious defense" under Civil Rule 60(B) and the three-pronged test set forth in GTE Automatic Electric v. ARC Industries, 47 Ohio St.2d 146 (1976) was that the Bank was not the owner and holder of the note and mortgage when it filed the foreclosure complaint, and that it submitted fraudulent proof of ownership when it filed the complaint. He further claimed that had he been granted a hearing, he could have challenged the authenticity of the Bank's documentation.

The Appellate Court rejected Whiteman's challenge based on his lack of standing, holding that "because a debtor is not a party to the assignment of the note and mortgage, the debtor lacks standing to change their validity" {¶17}, citing LSF6 Mercury REO Invests. Trust Series 2008-1 c/o Vericrest Fin., inc. v. Locke, 10^th Dist. No. 11AP-757, 2012-Ohio-4499, Bank of New York Mellon Trust Co. v. Unger, 8^th Dist. No. 97315, 2012-Ohio-1950 and Bridge v. Aames Capital Corp., Case No. 1:09 CV 2947 (N.D. Ohio 2010).

The Court further observed that the allegedly "invalid mortgage assignments did not alter the homeowners' obligations under the note and mortgage" {¶18}. Notably, Argent, the original creditor/ mortgagee and the Bank, the assignee/ foreclosing creditor/ mortgagee did not dispute the validity of the assignment between them; in addition, Whiteman's payment default was undisputed.

The appellate court also affirmed the trial court's denial of Whiteman's Civil Rule 60(B) motion on procedural grounds. Whiteman alleged that because the Bank did not own that note and mortgage when it filed the foreclosure, it commitment fraud justifying relief from judgment under Civil Rule 60(B)(3). However, the appellate court distinguished between fraud that prevents the losing party, here Whiteman, from fully and fairly presenting his claim or defense, which does justify relief under Civil Rule 60(B)(3), and fraud that actually serves as the basis for a claim or defense, which does not justify relief from judgment. Here, there was no allegation that the Bank prevented Whiteman from fully and fairly presenting his claim or defense. Whiteman defaulted, plain and simple. He could have, but did not, answer the complaint. Because the Bank did not prevent Whiteman from presenting his fraud defense, he was not entitled to relief under Civil Rule 60(B).

The appellate court also rejected Whiteman's claim that, due to the allegedly invalid assignment, the trial court lack of subject matter jurisdiction and therefore erred in denying his motion to dismiss under Civil Rule 12(B)(1), holding that a lack of standing does not deprive a court of subject matter jurisdiction.

The Bank was represented by Matthew J. Richardson of Manley Deas Kochalski, LLC; Whiteman was represented by Marc E. Dann and Grace Doberdruk of Dann, Doberdruk and Harshman, LLC.

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, 10^th 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. 

The proposal would have permitted a county to charge up to $2 per page or up to a $500 annual subscription fee. The proposal faced opposition from a number of groups, including attorneys, realtors, title companies and newspapers, that search county recorders' web sites for recorded information, such as deeds and mortgages, that is currently available on line for free.

The proposal was the Ohio Recorders' Association's response to a June 12, 2012 letter from Ohio Attorney General Mike DeWine stating that the practice of some county recorders of creating subscription-only searchable Internet databases for accessing certain public records was not authorized under Ohio law. Attorney General DeWine cited to a 2000 Ohio Attorney General's opinion (No. 2000-046) for the proposition that "a county recorder may not charge and collect a fee for providing Internet access to indexed public records." Attorney General DeWine further recommended that the Ohio Recorders Association request that the General Assembly "amend the relevant statutes to provide this authority."

The Ohio Recorders Association is expected to attempt to re-introduce this proposal next year.

• The bill clarifies and simplifies the process by which shareholders are notified of their right to dissent and exercise that right, and by allowing the corporation to require this process to be substantially completed prior to the shareholder vote, which simplifies and expedites the completion of transactions.
• For corporations with shares listed on a stock exchange, it confirms Ohio Supreme Court precedent that the fair value of the corporation’s shares is the market price on the stock exchange where they trade.
• Further, if a shareholder of such a company will receive other exchange traded shares in the transaction, the bill would dispense with the need for a court appraisal process.
• For companies without exchange listed shares, the bill confirms (consistent with Ohio Supreme Court precedent) that fair value of the corporation’s shares is to be determined without the application of premiums or discounts for control or marketability.
• Since most shareholders now hold their shares indirectly through brokers or other intermediaries, the bill would make it easier for them to exercise dissenter’s rights.  

Corporate Dissolutions: Ohio’s current procedures for dissolving corporations are out of date, having not changed substantially since 1955, leaving us out of step with other major commercial states.  Sub. House Bill 48 adopts changes to these procedures that will make them more efficient and less burdensome to implement.  The significant changes are:

• The bill creates a liquidation process that will expedite the determination and payment of creditor claims.  If claims are not disputed, the liquidation and payment process can proceed without court involvement, although the right of creditors and shareholders to obtain court intervention is preserved.
• It establishes time limits for the presentation of claims, providing certainty regarding the time period in which directors, officers and shareholders of the corporation face exposure to potential claims.
• It clarifies the standards to be followed by directors in determining the existence and amount of claims, and providing for their payment.
• It modernizes the process of notifying creditors and the public of the pending dissolution of a corporation by requiring the Secretary of State to list on its website the corporations that are being dissolved, while retaining for a five-year transition period the current requirement for publication of notice in a newspaper of general circulation.

Indemnification Provision.  The bill contains a provision making make it clear that rights of corporate directors and officers to indemnification under the corporation’s articles of incorporation or regulations cannot be abrogated retroactively as to past acts by a later amendment of these provisions.  Delaware recently adopted a statutory amendment to the same effect.

Limited Liability Company Amendments:  The bill makes a number of changes to the LLC Act. The bill:

• clarifies the provisions of ORC §1705.61, which was enacted in 2006, to insert language inadvertently omitted from this section in the legislative process;
• make it express in the statute that a limited liability company is bound by its operating agreement;
• confirms that the only remedy of a judgment creditor of a member with respect to his membership interest is to obtain a charging order (even for single member LLCs);
• confirms the power of the operating agreement to vary statutory default rules, subject to certain non-waivable provisions (based on what is now in Chapter 1776 for partnerships);
• defines the fiduciary duties of members and managers;
• expressly allows members to agree to arbitration (based on comparable provisions of Chapter 1776 for partnerships); and
• gives courts more guidance on when judicial dissolution would be appropriate (also based on Chapter 1776).