Banking & Finance Law Report

Tag Archives: Commercial Lending

New Statute Makes It Easier for the Small Business Administration to Lend to ESOPs

Every business owner must make a decision regarding what he or she will do with the business. If no family member is able or willing to assume ownership, an increasingly popular succession planning strategy has been to sell the business to an employee stock ownership plan (“ESOP”).  ESOPs are popular in part because of the tax advantages they provide to the selling business owner, the company, and the employees.  Smaller businesses who have considered adopting an ESOP, however, sometimes have faced challenges securing financing on acceptable terms.  That could occur if the business’s assets (both tangible and intangible) did not provide sufficient collateral.  Further, the Small Business Administration (the “SBA”) 7(a) Loan Guaranty Program often was of little help because Section 7(a) of the Small Business Act did not reflect modern ESOP loan practices.

The SBA hurdle just became easier to overcome with the Main Street Employee Ownership Act (the “Act”), which was signed into law as part of the 2019 National Defense Authorization Act. The Act should improve SBA lending to ESOPs in the following ways:…

Practice Pointer for Creditor’s Rights Counsel: Draft Complaints With the New Warrant of Attorney Bench Card in Mind

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 …

Potential Changes for HVCRE Loans

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 …

HB 67 Warrants of Attorney

Another attack on the use of warrants of attorney to confess judgment was recently introduced into the 132nd Ohio General Assembly.  H.B. 67 was introduced on February 16, 2017 by Representative Ron Young, a Republican of Leroy Township in Lake County.  The bill has not yet been assigned to a committee.

The bill seeks to amend R.C. §2323.13(A) to limit a confession of judgment to situations involving “the settlement of a dispute”. The bill does not further define that phrase.  Echoing the “dispute settlement” language, H.B. 67 would also amend R.C. §2323.12 to limit confessions of judgment to the “settlement of a dispute” under R.C. §2323.13 and makes a violation of the law a first degree misdemeanor.

The final amendment sought by H.B. 67 is to Ohio’s power of attorney statute, R.C. §1337.53 at subsections (F)(1), to prohibit the use of a general power of attorney with respect to claims and litigation to confess judgment. Echoing the changes to R.C. §§2323.12 and 2323.13, R.C. §1337.53(F)(2) would limit the use of a general power of attorney to confessing judgment “in connection with the settlement of a dispute.”

The absence of any explanation of the meaning of the phrase “in connection …

Location is Not Everything When Perfecting a Security Interest

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).…

Expanding the Defense of Ordinary Course and Widening the Range of Acceptable Payments During the Historical Period

The Seventh Circuit Court of Appeals in Unsecured Creditors Committee of Sparrer Sausage Co., Inc. v. Jason’s Foods, Inc., 2016 WL 3213090 (7th Cir. June 10, 2016) expanded the scope of the ordinary course defense in a bankruptcy preference action.  This case provides an excellent road map for a creditors’ rights attorney defending a preference suit and suggests arguments for increasing the payments a creditor can retain even if those payments were made during the 90-day preference period.

Here are the facts in Jason’s Foods.  During the 90-day preference period, the debtor paid invoices it received from Jason’s Foods totaling about $587,000.00.  The Unsecured Creditors’ Committee filed suit asking the bankruptcy court to avoid all payments made within the 90-day preference period.  The bankruptcy court ruled that prior to the preference period, the debtor generally paid the invoices to Jason’s Foods within 16 to 28 days.  Accordingly, of the 23 invoices paid during the preference period, 12 were within the range and 11 were outside the range.  Thus, the bankruptcy court concluded that $306,110.23 of the payments were not made in the ordinary course.  The issue for the Seventh Circuit was whether the bankruptcy court set the …

Supreme Court Enhances Creditor’s Right to Bar Debtor’s Discharge of Debts-Expanding Reach of Actual Fraud and Shareholder’s Liability

Until the recent U. S. Supreme Court’s decision in Husky International Electronics, Inc. v. Ritz, __ U.S. __, 136 S.Ct. 1581, 194 L.Ed.2d 655, 84 U.S. L.W. 4270 (2016),  there was disagreement in the circuit courts regarding whether a debtor in bankruptcy could be denied a discharge under 11 U.S.C. § 523(a)(2)(A) where the evidence of wrongdoing proved the debtor committed actual fraud, but there was no evidence that the debtor made a misrepresentation to the creditor seeking to bar the discharge.  For example, assume you represent a supplier who has a judgment against an insolvent company.  Assume further that you discover that the company’s major shareholder fraudulently transferred assets of the company to other entities which resulted in the company’s insolvency.  Accordingly, you file a piercing-the-corporate-veil claim against the shareholder and obtain a judgment.  However, before you can collect on the piercing claim, the shareholder files for bankruptcy protection.  You file an adversary proceeding seeking an order denying the discharge of the shareholder’s debt based on the fraudulent transfer scheme and the piercing-the-corporate-veil claim.  The shareholder counters and argues that the debt is nevertheless subject to discharge because § 523(a)(2)(A) requires evidence that the debt was obtained by …

Federal Reserve Expresses Openness to Relaxation of HVCRE Regulations on Community Banks

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.” …

NCUA Approves Rules Easing Restrictions on Credit Union Commercial Loans

Last year, as discussed by this blog, the NCUA proposed a new set of regulations designed to ease restrictions on business lending by credit unions. These regulations would remove all prescriptive limits on member business loans (“MBLs”) and replace them with the fundamental principle that commercial loans must be appropriately collateralized.

The NCUA recently approved a final version of these regulations substantially identical to the proposed version. Most notable among the relatively minor changes from the proposed version:

  • The proposed rules loosened the limit on the aggregate dollar amount of commercial loans to a single borrower from 15% of the credit union’s net worth or $100,000 to 25% of the credit union’s net worth, provided that the additional 10% of the credit union’s net worth was fully secured at all times with a perfected security interest by readily marketable collateral. The final rules relax the limit even further by excluding from the limit any insured or guaranteed portion of a commercial loan made through a program in which a governmental agency insures or guarantees repayment.
  • Unlike the proposed rules, the final rules permit existing state rules to supersede Part 723 of the new rules if the state rules cover

Proposed Limitations On The Use Of Cognovit Notes

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

NCUA’s Proposed Rules Concerning Credit Union Commercial Loans

Credit unions’ ability to lend to businesses may receive a boost if proposed NCUA regulations are approved. Business loans are becoming an increasingly important part of credit unions’ operations. Total business loans at federally insured credit unions grew from $13.4 billion in 2004 to $51.7 billion in 2014, growing from 3% of all total credit union loans to 6.8% over the same period. As of 2014, 36% of credit unions offer business loans, the vast majority of which (76%) are held by credit unions with assets greater than $500 million.

However, certain business loans, termed “member business loans” (“MBLs”), are limited by statute and regulation. An MBL is defined as a loan through which the borrower uses the proceeds for commercial, corporate, agricultural, or other business purposes, excluding extensions of credit that: …

Newly Effective HVCRE Loan Rules

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:…

Seriously Misleading UCC Searches

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.”…

STRUCTURED DISMISSAL OF CHAPTER 11 CASES AND THE INVOLUNTARILY SUBORDINATED CREDITOR: Official Comm. of Unsecured Creditors v. CIT Group/Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015)

The United States Court of Appeals for the Third Circuit plays a uniquely important role in the development of the bankruptcy laws.  The liberal venue rule for bankruptcy cases set out in 28 U.S.C. § 1408 has led to the disproportionate filing of large and mega chapter 11 bankruptcy cases being filed in the District of Delaware.  The decisions of the Third Circuit are binding on the District Court and Bankruptcy Court for the District of Delaware.  Consequently, the decisions of the Third Circuit govern that disproportionate number of large and mega chapter 11 cases.  Furthermore, because the bankruptcy court decisions in these mega cases often involve greater dollar amounts, they are more likely to be appealed, which can result in the Third Circuit being one of the few circuit courts to address a given issue.

In Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015), the Third Circuit recently considered the propriety of a “structured dismissal” of a chapter 11 case that provided for a distribution of estate assets contrary to the distributional scheme set out in the Bankruptcy Code.  In Jevic, the debtor was …

The Modernization of Ohio’s Receivership Statute

I.  Introduction

Effective March 23, 2015, Ohio’s antiquated receivership statute (Ohio Rev. Code Chapter 2735) will be modernized, particularly as it relates to the appointment of a receiver in commercial mortgage foreclosures and the ability of a receiver to sell real estate free and clear of liens.

 II.  Appointment of a Receiver

Previously, commercial mortgagees were a bit hamstrung because only two of Ohio Rev. Code Section 2735.01’s provisions for appointment of a receiver typically potentially applied, Section 2735.01(B) (“In an action by a mortgagee, for the foreclosure of his mortgage and sale of the mortgaged property, when it appears that the mortgaged property is in danger of being lost, removed, materially injured, or that the condition of the mortgage has not been performed, and the property is probably insufficient to discharge the mortgage debt”) and Section 2735.01(F) (“In all other cases in which receivers have been appointed by the usages of equity”).  In situations where it was unclear whether the property was worth less than the unpaid mortgage balance, some courts struggled with the decision of whether to appoint a receiver, even in cases where the borrower agreed in the mortgage to appointment of a receiver upon the occurrence …

Does your construction mortgage really protect you from mechanic’s liens?

If you are a lender/mortgagee and your borrower/mortgagor is adding more real property collateral to the mortgage (in Ohio), how do you retain your first priority position in all mortgaged property while adding that property to the mortgage? This question is especially relevant when the borrower is assembling property as part of a development. The answer may not be as simple as you think.

You could do an amended and restated mortgage, but that could be construed as replacing the original mortgage, which would cause the priority of the mortgage to be changed from the recording date of the original mortgage to the recording date the amended and restated mortgage. So, instead you could record an amendment or modification which adds property to the mortgage. Naturally you would include a provision that states that all of the original mortgage provisions continue in full force and effect. That should do it, right? Well, recently one Ohio Court said “no.”

In 2003, Bridgeview Crossing LLC (“BC”) began assembling properties for a commercial development. In 2006 BC signed a $24,000,000 Cognovit Note and granted an open-end construction mortgage (the “Original Mortgage”) in favor of its lender (the “Mortgagee”). There was evidence that Panzica …

FDIC Guidance on Agricultural Credits

At a time of relative affluence in the farming industry, the FDIC has issued a warning on a need for monitoring agricultural credits. FIL-39-2014 (July 16, 2014) suggests that banking institutions of all sizes should carefully consider a recent, negative projection by the U.S. Department of Agriculture.

While current market conditions are good, the projection suggests there will be a slowdown in the growth of the farming and livestock sectors and that agriculture may be affected by adverse weather and declining land values, among other factors.

The guidance suggests that financial institutions should work carefully with agricultural borrowers when they experience financial difficulties. The guidance states that the FDIC’s supervisory expectations previously expressed in a 2010 financial institution letter continue (although the letter is rescinded in light of the current letter).

Cash flow analysis, secondary repayment sources and collateral support levels must be considered in order to properly analyze agricultural credits, according to the guidance.

The guidance notes that smaller farms and ranches rely on the personal wealth and resources of the owners, including off-farm wages. A universal review of the financial strength of the credit is required.

The guidance also notes workout strategies must be specifically tailored for agricultural …

Ohio Law on Cognovit Judgments and Relief Under Civ R. 60(B)

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 …

Planning For Leasehold Financing

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 …

It’s Easy, People: Read Before You Sign

In a decision that will warm the hearts of vendors everywhere, the Court of Appeals for Ohio’s Eighth Appellate District recently upheld the enforceability of personal guaranty language in a credit application. See Wholesale Builders Supply, Inc. v. Green-Source Development, L.L.C., et al., 2013-Ohio-5129. This decision also serves as a reminder to read before signing.

The form of credit application used by Wholesale Builders Supply, Inc. (“Wholesale”) with prospective customers included the following language:

BY SIGNING THIS AGREEMENT YOU ARE BOTH PERSONALLY AND CORPORATELY LIABLE FOR THE TOTAL OF YOUR PURCHASES BY YOU OR ANYONE DESIGNATED TO SIGN FOR YOUR PURCHASES ON YOUR ACCOUNT.

Defendant Green Building Technology, L.L.C. (“Green”), through its principal John A. Pumper (“Pumper”), executed one of Wholesale’s credit applications, and Green thereafter ordered and received goods from Wholesale, along with invoices from Wholesale.…

Amendment to Agricultural Lien Law Reinforces Decision in Ohio Dept. of Agriculture v. Central Erie Supply & Elevator Association

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.…

Agreeing to Renegotiate a Loan Does Not Waive Lender’s Right to Foreclose

In its Oct. 30, 2013 decision 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.

In 2007, Tartan Fields Golf Club, Ltd. borrowed $13.3 million from GECC and secured the loan with a mortgage on its Delaware County golf course development. When Tartan Fields approached GECC in early 2009 about renegotiating the loan, GECC required that Tartan Fields sign a “Pre-Negotiation Agreement” that provided, among other things, that Tartan acknowledged that GECC had no fiduciary, confidential or special relationship with GECC; the Pre-Negotiation Agreement also gave both parties the unilateral right to terminate negotiations with three business days’ notice to the other party in their sole discretion and contained an integration clause.…

Lending Issues to Consider With Respect to The Perishable Agricultural Commodities Act of 1930

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 …

What Goes Up … Quick Glance #3 at Ohio Oil and Gas Leases in Bankruptcy

As with our prior posts on oil and gas leases in bankruptcy (located here and here), this post presents another thorny issue – namely, “Is an oil and gas lease a lease at all?”

Whether an oil and gas lease is a “lease” is significant in the bankruptcy context, because the Bankruptcy Code has several provisions regarding the treatment of leases.

This post considers two cases that interpret 11 U.S.C. § 365(d)(4), which provides that unless the bankruptcy court orders an extension, “an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by … the date that is 120 days after the date of the order for relief [(typically, the commencement of the case)]….” The Code further provides that “the rejection of an … unexpired lease of the debtor constitutes a breach of such contract or lease … immediately before the date of the filing of the petition.” …

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