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 loan and makes any provision purporting to create such a carveout invalid and unenforceable. The Ohio General Assembly stated that the use of a post-closing solvency covenant as a carveout to a nonrecourse loan is inconsistent with the nature of a nonrecourse loan and is “an unfair and deceptive business practice and against public policy.”

Financial institutions engaged in commercial lending in Ohio should consult legal counsel about how this new statute affects their loans. Read the full article.

3. Ohio Legacy Trusts
by Grant Stephenson

In March 2013, Ohio became one of a number of states with a so-called “asset protection” statute. The Ohio Legacy Trust Act creates another way to attempt to shield assets from creditor claims. Criticisms of similar domestic asset protection trust statutes have developed in the states that have had such statutes for a period of time — such as Alaska, Delaware and Hawaii.

Generally speaking, under common law, the assets in self-settled trusts are available to creditors of the settlor to the same extent the assets would be in the hands of the settlor. Asset protection statutes, which thwart that result, are the subject of frequent attack. Opponents argue, for instance, that under the Full Faith and Credit Clause of the U.S. Constitution. a state court must recognize and enforce the judgments granted by another state’s court. The argument is that an Ohio court would not be able to apply the protective provisions of the Ohio legacy trust act against a judgment rendered in another state that the transfer to the legacy trust was a fraud on creditors. Read the full article.

4. Lending License Required for Real Estate Commission Financing
by Polly Harris

In August 2013, the Tenth Appellate District Court of Appeals 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.

The decision in Fenway Financial, LLC dba Commission Express v. Greater Columbus Realty, LLC dba Keller Williams Greater Columbus Realty, LLC demonstrates that appellate court looked behind labels to ascertain the substance of a transaction, and also shows the state’s current bent to restrict what is in essence payday lending geared toward real estate agents. Read the full article.

5. The Sixth Circuit Holds that Bankruptcy Courts Lack the Inherent Power to Award “Serious Non-Compensatory Punitive Damages”
by Andrew Nicoll

Nearly 30 years after enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984 and establishment of the current bankruptcy court structure, courts are still struggling to understand the bounds of a bankruptcy court’s jurisdiction and power.

In Adell v. Honigman, Miller, Schwartz & Cohn, LLP (In re John Richards Homes Building Company, LLC), Case Nos. 12-2012, 12-2013, 12-2014, and 12-2015 (6th Cir. Nov. 20, 2013) (unpublished), the Sixth Circuit held that neither 11 U.S.C. § 105 nor the inherent powers of a bankruptcy court permit a bankruptcy court to enter “serious noncompensatory punitive damages.” The bankruptcy court in Adell had entered an award of $2.8 million in sanctions as a consequence of a party’s continuing pattern of abuse of the judicial process in evading a prior monetary judgment entered against him by the bankruptcy court.

In reversing the punitive damage award, the Sixth Circuit held that though 11 U.S.C. § 105 empowers a bankruptcy court to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title [and to take] any action or mak[e] any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.” Read the full article.

6. Due Diligence in Lending to the Oil and Gas Industry
by Chris Baronzzi

Though Ohio lenders that finance companies in the oil and gas industry will encounter some of the same due diligence issues found in other industries, the oil and gas business is a world of its own. Lenders must understand:

  • The shale oil and gas revolution has inspired a new generation of entrepreneurs who may be financially unstable
  • Legislative and regulatory bottlenecks as well as shortages of supply could slow project timelines
  • The meaning a terms such as farmout agreement, assignment of interests, joint operating agreement, area of mutual interest, overriding royalty, working interest, net revenue interest, held by production and deep rights
  • Assets that are unique to the oil and gas industry, including leases, wells, royalties, reserves and contractual arrangements

For these reasons and many more, it is essential for lenders to engage experienced counsel to ensure that the due diligence is properly conducted before extending credit secured by oil and gas assets. Read the full article and our e-books about oil and gas sector financing and oil and gas leases in bankruptcy.

7. Health Care Financing: Security Interests in Deposit Accounts containing Medicare/Medicaid Receivables
by Amy Strang

Lenders making secured loans to health care providers with Medicare and Medicaid receivables should be aware of limitations on their ability to perfect security interests in such borrowers’ deposit accounts. Secured lenders may perfect security interests in their borrowers’ accounts receivable (and identifiable cash proceeds therefrom) by filing UCC financing statements, but when proceeds of those accounts receivable are received by borrowers and deposited into borrowers’ deposit accounts, security interests in the deposit accounts themselves can be perfected only by obtaining “control” over the deposit accounts pursuant to § 9-104(2) of the UCC.

To perfect such security interests in deposit accounts, revolving credit facilities are, therefore, typically subject to deposit account control agreements. In a deposit account control agreement, the borrower, the secured lender and the depository bank agree that the depository bank will comply with instructions from the secured lender directing disposition of the funds in the deposit account, without further consent by the borrower. This arrangement enables the secured lender to obtain control over the deposit account, thereby perfecting its security interest in the deposit account pursuant to UCC §9-312(b). Read the full article.

8. Agreeing to Renegotiate a Loan Does Not Waive Lender’s Right to Foreclose
by Polly Harris

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.

The case is a strong reminder to lender’s counsel to enter into a pre-negotiation agreement that, at the very least, contains these terms:

  • The parties do not have a fiduciary, confidential or special relationship
  • Both parties have the unilateral right to terminate negotiations in their sole discretion with written notice of a specified length
  • By entering into negotiations, the lender is not waiving any existing or future defaults
  • The loan documents remain in full force and effect
  • An integration clause

Read the full article.

9. Basel III Capital Rules and Community Banks
by Grant Stephenson

The final Basel III Rules, issued in summer 2013, resolve several important community banking issues:

  • Accumulated other comprehensive income — Banking organizations, other than the largest banks, will have a one-time election to opt out of the requirement to include accumulated other comprehensive income in common equity tier 1 capital
  • Trust preferred — Banks with less than $15 billion in assets will be allowed to count trust preferred as tier 1 capital
  • Commercial real estate — A new risk weight of 150% exists for certain kinds of high-risk commercial real estate lending
  • Residential mortgages — Residential mortgages are excluded from the risk weighting scheme of the Basel III capital rules.
  • Capital buffers — To be well-capitalized and have no restriction on the amount of earnings that can be distributed, an additional capital buffer of 2.5% must be maintained; this rule will be phased in between 2015 and 2019
  • Sub-chapter S banks — Sub-chapter S banking organizations will face some particular problems with respect to distributions in light of the new capital buffer requirements.
  • Prompt Corrective Action — Ratios for prompt corrective action are increased in some cases

The rules became effective Jan. 1, 2014 for the largest banks; smaller banking organizations must comply by Jan. 1, 2015. Read the full article.

10. Lending Issues to Consider With Respect to the Perishable Agricultural Commodities Act of 1930
by Andrew Bojko

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. Read the full article and related posts about the Agricultural Lien Law and Food Security Act.