Banking & Finance Law Report

Treasury delays April 15 tax filing and payment deadline

On March 30, 2020, we posted an update to this blog, “IRS clarifies information about delayed tax filing & payment deadlines.” Click here to read the update.

In response to the COVID-19 pandemic and the increased strain placed on individuals and business taxpayers during this time, the IRS has pushed back certain payment deadlines to ease the burden on taxpayers.

The plan that was published as of this writing, Notice 2020-17 (the “Notice”), impacts any person with a Federal income tax payment due April 15, 2020. The Notice postpones such Federal income tax payments to July 15, 2020, subject to certain limitations.

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COVID-19 and OSHA: Commonly asked questions

“The OSHA General Duty Clause requires all employers to provide a workplace free from known hazards. That includes known exposure to infectious diseases. So, OSHA does expect employers to take reasonable measures to protect workers from workplace exposure to COVID-19,” our colleague Mike Underwood explained expectations from the Occupational Safety and Health Administration (OSHA) during the COVID-19 outbreak.

Read the full post on our Employer Law Report Blog.

UPDATE: Foreseeable pitfalls of the SAFE Banking Act

The SAFE Banking Act has hit a snag in Congress thanks to opposition from the chair of the Senate Banking Committee.  The October 2019 post, “Temper Your Expectations on Cannabis Banking Reform: foreseeable pitfalls of the SAFE Banking Act,” explained how the SAFE Act intended to alleviate the bank industry’s cannabis problem, and where it may fall short. We are proud to share that our first post on the topic recently received national recognition as “Best Legal Analysis” in the 2019 LexBlog Excellence Awards.

On September 25, 2019, the Secure and Fair Enforcement (SAFE) Banking Act of 2019 passed the U.S. House of Representatives by an impressive margin of 321 to 103. The U.S. Senate—once seen as a gauntlet of insurmountable obstacles to cannabis banking reform—has also seen some meaningful progress.

Senator Mike Crapo (R., Idaho), the influential chair of the Senate Banking Committee overseeing the SAFE Act in the Senate, previously expressed no interest in allowing the SAFE Act a vote out of committee that would enable the full Senate to vote on its passage. But now, Mr. Crapo has expressed interest in voting on the SAFE Act before year’s end. And Senate Majority Leader, Mitch McConnell, whose public comments on marijuana have been negative, recently met with marijuana industry executives in a move some see as potentially signaling McConnell’s eventual support for cannabis banking reform.

Read the rest of “Temper Your Expectations on Cannabis Banking Reform: foreseeable pitfalls of the SAFE Banking Act” here. 

Commercial Loans: Equity Cure Provisions

Background

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 or their financial sponsors will request and lenders, in some cases, agree to the inclusion of an equity cure provision in the credit agreement. The borrower’s ability to utilize an equity cure to stave off a potential default is not unlimited, however. Typically, lenders will impose certain limitations on a borrower’s ability to use these provisions. When negotiating equity cure provisions, borrowers and lenders must consider a variety of factors to best serve their interests.

Frequency of Equity Cures

For borrowers, one of the most important aspects of an equity cure provision is how often the borrower can use the equity cure. Lenders prefer to limit the number of cures allowed throughout the term of the agreement and will often restrict the number of uses of the cure in consecutive periods. For example, a lender may limit a borrower’s exercise of an equity cure provision to no more than twice in one year and no more than three times over the term of the agreement. Such limitations enable the lender to prevent a scenario where the borrower could potentially use the equity cure as a cover-up for its continuing financial struggles. When negotiating an equity cure provision, borrowers should push to minimize the restrictions on their ability to use the cure, which will decrease the likelihood of defaulting on a financial covenant. Continue Reading

Temper Your Expectations on Cannabis Banking Reform: foreseeable pitfalls of the SAFE Banking Act

On September 25, 2019, the Secure and Fair Enforcement (SAFE) Banking Act of 2019 passed the U.S. House of Representatives by an impressive margin of 321 to 103. The U.S. Senate—once seen as a gauntlet of insurmountable obstacles to cannabis banking reform—has also seen some meaningful progress.

Senator Mike Crapo (R., Idaho), the influential chair of the Senate Banking Committee overseeing the SAFE Act in the Senate, previously expressed no interest in allowing the SAFE Act a vote out of committee that would enable the full Senate to vote on its passage. But now, Mr. Crapo has expressed interest in voting on the SAFE Act before year’s end. And Senate Majority Leader, Mitch McConnell, whose public comments on marijuana have been negative, recently met with marijuana industry executives in a move some see as potentially signaling McConnell’s eventual support for cannabis banking reform.

Following the Act’s passage in the House, and with an improving outlook in the Senate, financial institutions have been preparing for increased involvement with cannabis-related businesses. However, while many believe the SAFE Act is closer than ever to solving the country’s cannabis banking woes, we believe that the Act’s passage alone may not provide the cannabis industry with relief; at least not quickly. Continue Reading

OHIO’S NEW NOTARY LAW REQUIRES IMMEDIATE ATTENTION

Ohio is a relatively new adopter (September 20, 2019) of laws permitting electronic on line notarization. These new laws generated a great deal of excitement when they went into effect on September 20, 2019, creating new licensing, education and requirements for “electronic notarial acts”. There are however, several relatively mundane aspects of the law that will affect the daily work of bankers, lawyers, the real estate industry and other businesses such as wealth management where signature attestation may be required.

Ohio Revised Code Section 147.542 addresses the form and content of notarial certificates. It requires in part that for both an acknowledgment and a jurat[1], the notarial certificate shall indicate the type of notarization being administered. Moreover, if the certificate is incorrect, the notary must provide a correct certificate at no charge.

Under the new law, an acknowledgment certificate must clearly state that no oath or affirmation was administered and a jurat certificate must state that no oath or affirmation was administered. The counterpart to those requirements is that a notary cannot use an acknowledgment certificate when an oath or affirmation was administered and a jurat certificate cannot be used if no oath or affirmation was administered. Section 147.011(A) also states that the failure to administer an oath when required shall result in the notary losing his or her commission for three years. Continue Reading

The Bank Industry’s Cannabis Problem

The banking industry has a cannabis problem—it cannot bank cannabis related businesses.

Despite the fact that over 35 states have legalized medical cannabis in some form and more than 10 others have recreational cannabis laws, the mainstream banking industry has been largely unable to provide services to lawful cannabis companies. That is because federal law still views cannabis as an illegal Schedule I drug subject to the Controlled Substances Act—on par with drugs such as heroin.

This complex federal overlay has prevented the banking industry from being able to service not only cannabis companies, but also non-plant touching ancillary businesses working with cannabis companies. Consequently, banks are forced to sit on the sidelines while cannabis companies try to figure out what to do with their growing cash reserves. Continue Reading

Ohio Legislature reaffirms approval of electronic transacting, but lenders beware of e-note enforceability

Earlier this month, SB 220, the Ohio law that amended Ohio’s version of the Uniform Electronic Transaction Act (UETA) became effective. The amendment to the UETA confirms that records, contracts, and signatures that are secured through blockchain technology, i.e., a technology that creates an unalterable electronic ledger, will be considered an electronic recording holding the same legal legitimacy as its printed counterpart.[1] As a result, records, contracts, and electronic signatures secured through blockchain technology cannot be denied legal effect or enforceability solely because it is in electronic form.[2]

By expressly stating that the UETA applies to electronic records and signatures secured through blockchain technology, the Ohio legislature has reaffirmed that the law is adapting to modern trends of efficient Internet-based transacting. This change not only reduces paper waste, but decreases burdens associated with paper transacting, such as printing, scanning, mailing, and filing.

Nevertheless, lenders should be particularly cautions when adopting electronic records transactional systems. The UETA does not apply to certain transactions governed by Ohio’s version of the Uniform Commercial Code (UCC), including the issuance of promissory notes. The UETA does however apply to “transferrable records,” or any electronic record that would be considered a note under the UCC if the record were in paper form (“e-note”).[3] Nevertheless, a lender must meet rigorous requirements in order to ensure that it will be able to enforce an e-note.

In order to ensure compliance with Ohio legal requirements for contracting and executing e-notes, certain protocols should be adopted to establish authenticity of electronic signatures, preserve the integrity of the document, mitigate risks of repudiation, and establish the lender’s control over the original executed document. In order to reliably create, maintain and transfer control of an e-note, the lender should adopt an electronic-based system, approved by all parties in the transaction, that meets the following requirements:

  1. The lender, or its designated custodian, shall always retain a single authoritative copy of the e-note. The authoritative copy should be unique, identifiable, and unalterable
  2. The authoritative copy must identify the person asserting control of the e-note. This person should either be (a) the person to which the transferable record was issued, or (b) the person to which the e-note was most recently transferred; and
  3. The authoritative copy is communicated to and maintained by the person asserting control or its designated custodian.
  4. Any copies to the authoritative copy are made with consent of the person asserting control, shall be readily identifiable as the copy, and shall state whether the copy is authorized or unauthorized.

The adoption of SB 220 provides further evidence that electronic-based transaction is not only a legitimate practice in Ohio, but may soon become the standard. However, in order to ensure that a lender will be able to enforce promissory notes regardless of the document’s electronic format, the lender must be able to provide evidence that it has complied with the above requirements.

[1] R.C. § 1306.01(G), (H).

[2] See R.C. § 1306.06(A), (B).

[3] See R.C. § 1306.15(A)(1).

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