Distressed commercial tenants and their landlords may find themselves in tense situations during the COVID-19 pandemic. As those parties consider how to handle their lease obligations, they should consider, among other things, the varying contours of recent executive and emergency orders. As shown below, orders from various jurisdictions have taken different approaches to addressing the pandemic’s impact on commercial tenants.…
In loan agreements, lenders customarily require the borrower to make various financial covenants whereby the borrower promises to achieve certain financial metrics, often requiring the borrower to stay above or below certain thresholds based on its operations. Since financial covenants are based on past financial performance, breaches of financial covenants typically cannot be cured in the absence of some sort of cure provision. This is why the concept of an equity cure provision is an attractive option for borrowers. An equity cure provision allows a borrower’s shareholders to inject additional equity into the borrower in order to cure an existing breach of a financial covenant, so that the breach does not trigger an event of default. The issuance of additional equity creates a cash infusion enabling the borrower to increase its cash flow or EBITDA or reduce debt to meet the relevant financial covenants, such as a leverage ratio, operating cash flow ratio, or debt service coverage ratio. Essentially, an equity cure provision allows the borrower to go back in time to improve its financial metrics so that it is deemed to have been in compliance with the applicable covenant as of the measurement date. More and more, borrowers …
The Ohio Judicial Conference has issued a bench card, a copy of which is attached, that gives Ohio’s Common Pleas Court judges a checklist they may use when presented with an order seeking judgment on a note containing a warrant of attorney. While the bench card is merely advisory, it represents a victory for those who want to limit the use of warrants of attorney to confess judgment to monetary defaults only, and appears to be an end-run around the legislative process.
The checklist contains the following six items (quoted verbatim):
- Original Note produced and Complaint has copy of note attached as exhibit?
- Complaint incudes statement regarding last known address of the defendant either in averment or within caption?
- At least one maker resides in jurisdiction or Note executed in jurisdiction where Complaint is filed?
- Note includes “warrant of attorney” with statutory language above or below signature?
- The Note does not arise from a consumer transaction?
- Default consists of nonpayment on note, rather than default of other provision unrelated to payment”.
There is debate on both sides of the debtor/ creditor bar about whether a warrant of attorney may be used on confess judgment for a non-monetary default, also …
In this blog, we have described some of the original concerns with the “high volatility commercial real estate” loan regulation as well as some suggestions for change. These rules apply to certain real estate loans for acquisition, development and construction.
Recently, there have been suggestions that changes are possible regarding “high volatility commercial real estate” loans or “HVCRE” loans.
Here is a quick reminder of the issues. Effective January 1, 2015, all banking organizations were required to allocate significantly more capital when making commercial real estate loans that were considered to be HVCRE. Under these rules, an HVCRE loan had a risk weight for capital purposes 50% greater than the risk weight of a non-HVCRE commercial loan. Questions quickly arose.
An HVCRE loan is a loan that finances the acquisition, development or construction of real property prior to permanent financing. The regulations apply to existing loans as well as new loans.
There are important exceptions to this classification including: loans on one to four residential properties, community development loans, agricultural loans and certain qualifying real estate loans.
For real estate loans to qualify for the exception, the loan to value ratio must be less than or equal to the applicable …
Most of us are familiar with that old saw “location, location, location”. While location might enhance the value of real estate, including the location as part of the collateral description in the UCC financing statement can limit the protections provided to a secured creditor and may provide a strategy for attack by a bankruptcy trustee. First Niagara Bank learned this valuable lesson but only after spending substantial legal fees to protect a security interest where perfection should have been routine.
In the case of Ring v. First Niagara Bank, NA (In Re: Sterling United, Inc.),____F.3d ____, 2016 U.S. App. LEXIS 23009 (2d Cir. Dec. 22, 2016) (No. 15-4131-bk.), the Chapter 7 Bankruptcy Trustee for Sterling United, Inc., (“Debtor”) sued First Niagara Bank (“First Niagara”) asserting that First Niagara’s security interests in Debtor’s assets were avoidable under 11 U.S.C. § 547. Under U.S.C. § 547(b)(4)(A), a trustee may avoid any “transfer of an interest of the debtor in property … made … on or within 90 days before the date of the filing of the petition” for bankruptcy, provided that those interests are not perfected security interests pursuant to 11 U.S.C. § 547(c)(3).…
Last year, as noted by this blog, the FDIC, OCC, and Federal Reserve imposed harsher capital requirements on certain “high volatility commercial real estate,” or HVCRE, exposures, in accordance with the Basel III international banking standards. These new requirements were opposed not only by the real estate industry but also by banking associations, particularly the Independent Community Bankers of America (ICBA). The ICBA argues that the Basel III rules were intended to apply only to large, internationally active banks, and that the rules place too great a regulatory burden on smaller institutions. A recent report by the Federal Reserve Bank of Philadelphia notes that CRE regulations disproportionately affect smaller banks, as “CRE represents approximately 50 percent of small bank loan portfolios, compared with just over 25 percent of large bank portfolios.” The report goes on to state that loans that might be classified as HVCRE under the new rules represent approximately 5% of total loans for the median commercial bank with total assets below $10 billion, “a modest, but certainly not insignificant, portion of small banks’ CRE portfolios.” …
The Ohio General Assembly is currently considering a bill that would greatly restrict creditors’ ability to ask debtors to sign cognovit notes. A cognovit note allows a creditor, upon a debtor’s default, to enter judgment against the debtor without the usual notice or hearing.
Current Ohio law, specifically Ohio Revised Code Section 2323.13, generally enforces cognovit notes, but Ohio courts will not enter judgment on a cognovit note unless the note contains specific disclaimer language clearly and conspicuously visible, warning the debtor that signing the cognovit note surrenders the debtor’s rights to notice and a court trial upon default.1 Additionally, cognovit notes are banned entirely in consumer transactions.2…
Lenders who finance commercial real estate exposures should be aware of new regulations that impose harsher capital requirements on certain “high volatility commercial real estate,” or HVCRE, exposures. In June 2013, the FDIC, OCC, and Federal Reserve jointly approved proposed rules intended to implement new international banking standards, known as the Basel III Capital Accords, as well as establish new risk-based and leverage capital requirements for financial institutions, as required by Dodd-Frank. The rules have been in effect for all banks since January 1, 2015, having applied to the largest banks one year prior.
Under the rules, an HVCRE exposure is defined as “a credit facility that, prior to conversion to permanent financing, finances or has had financed the acquisition, development, or construction (“ADC”) of real property,” if it fails to satisfy any of the following three capital requirements:…
Determining whether a security interest is properly perfected by using a state’s online lien search may be leading you astray.
Perfecting a security interest in collateral establishes the priority of the secured party’s claim to such collateral, providing the perfected secured party with an interest in such collateral superior to the rights held by most subsequently perfected security creditors or judicial lien creditors. For most types of collateral owned by an entity, a security interest may be perfected by filing a financing statement describing the security interest with the secretary of state’s office in the state where such entity is formed. A financing statement is a form of public notice intended to inform others dealing with such borrower (referred to as a “debtor”) that the debtor has granted a security interest in its assets.
The Uniform Commercial Code (“UCC”) dictates that a financing statement covering property owned by an entity debtor (as opposed to an individual) must identify the debtor by its exact legal name. Nonetheless, to alleviate the otherwise disastrous consequences of harmless errors or omissions in a financing statement, the law provides that financing statements are effective (even with errors) so long as they are not “seriously misleading.”…
In K One Limited Partnership v. Salh Khan, et al., 10th Dist. No. 13AP-830, 2014 Ohio 2079, the Tenth District Court of Appeals for Franklin County, Ohio reexamined the limited meritorious defenses available to obtain relief from a cognovit judgment under Civ. R. 60(B) and held that such defenses are restricted “to the integrity and validity of the creation of the debt or note, the state of the underlying debt at the time of confession of judgment, or the procedure utilized in the confession of judgment on the note.”
Defendants-Appellants executed a cognovit guaranty containing warrant of attorney language (“Guaranty”) to guarantee payment of a related-company’s revolving cognovit promissory note (“Note”) in favor of Plaintiff-Appellee. The parties and others were involved in numerous business ventures when they entered into the Guaranty and Note. When the Note subsequently went unpaid, Plaintiff-Appellee brought a cognovit action to confess judgment against Defendants-Appellants on the Guaranty, and the trial court entered cognovit judgment in favor of Plaintiff-Appellee. Defendants-Appellants timely filed a motion for relief from judgment under Civ. R. 60(B) admitting they executed the Guaranty but alleging as defenses that Plaintiff-Appellee and related individuals and entities had acted fraudulently toward them in this …
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 …
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 …
A recent change to Ohio’s agricultural lien law clarifies the interplay between security interests governed by Article 9 of the UCC and those governed by Ohio’s agricultural lien statutes, and confirms the ruling of the Sixth Appellate Court of Erie County in Ohio Dept. of Agriculture v. Central Erie Supply & Elevator Association, 2013-Ohio-3061.
Central Erie Supply & Elevator Association (Central Erie) operated a grain elevator that it used to receive grain and other commodities from farmers (known as “claimants” under the statutory scheme) and sell the commodities to third parties. This made Central Erie an “agricultural commodity handler” under Ohio Revised Code Chapter 926. Pursuant to ORC § 926.021(C), the claimants who provided commodities to Central Erie retained a statutory lien on the commodities until they were paid.…
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 …
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 …
In mid-September, an Ohio appellate court rendered a decision in a long-pending dispute that raises an important issue for health care lenders: the impact of a contested certificate of need application. The impact of such a contest should be carefully considered by health care lenders.
On September 18, 2012, the Ohio Tenth District Court of Appeals rendered a decision in In re Altercare of Stow Rehabilitation Center (091812 OHCA10, 12AP-29). The parties to the appellate case were Schroer Properties of Stow, Inc. (“Schroer”) and Kent Care Center (“Kent”). At issue was Schroer’s decision to relocate 31 nursing home beds from 3 other Stark County, Ohio, nursing facilities and to a new facility, Altercare of Stow Rehabilitation Center (“Altercare Stow”), to be constructed in Stow, Summit County, Ohio.
Schroer submitted its Certificate of Need (“CON”) application in July, 2007, but the Ohio Department of Health (“ODH”) did not declare the application “complete” until February 28, 2011, nearly 4 years after Schroer’s initial submission.…
From time to time we deviate from our normal prose on the banking and finance industry and give you, our reader, insight into other areas of the law that impact your business. A recent post regarding overhauling the Ohio employee-friendly employment discrimination law, Senate Bill 383, tops our list of quality reading material.
The post, ‘Senate Bill 383 is an Ohio employer’s wish list,’ from our Employer Law Report blog discusses significant amendments introduced to the Ohio Senate. In particular, Sara Hutchins Jodka goes into detail portions of the bill including defining employers to exclude managers and supervisors, limiting the statue of limitations to 365 days for discrimination and retaliation claims and put a statutory cap on noneconomic and punitive damages.…
This article is Part Two in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find Part One of this series here: Structuring Sales to Ensure Payment. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.
With the recent economic slowdown in many sectors and the parade of corrupt corporate executives on the evening news, corporate managers are more sensitive than ever to signs of troubled business practices and how those practices affect outstanding receivables. Many distressed businesses display early warning signs of impending trouble, including some or all of the following:
- Lack of a sound business plan- The company may not have a plan or may have expanded past the vision of it original business plan.
- Ineffective management style- The management of a small company that has experienced rapid growth may not be able to delegate authority effectively.
- Poor lender/vendor relationships- The company may not respond quickly or fully to its vendor’s request for financial information or may actively hide information from its vendors.
- Change in market conditions- The market for the company’s product may