Banking & Finance Law Report

Tag Archives: Ohio law

Be Conscientious About Standard of Care and Ethics Because, as with all Nightmares, This Could Happen to You

Editor’s Note:  From time to time, it is good for financial institution and other business executives to look at the world through from the point of view of their attorneys. In this context, we offer a recent experience of a Porter Wright attorney who is writing to reach other attorneys.

What could be a worse nightmare for an attorney and his client than the following scenario?

Because of a breakdown in communications between the attorney and the client during the sale of the client’s business, the client takes matters into his own hands, negotiates a few provisions in several agreements and closes the deal without seeking further advice from or telling the attorney. Shortly after the sale closes — and the client becomes an employee of the buyer — the seller is found to have breached the asset purchase agreement and, because of a cross-default provision in his employment agreement, is terminated for cause by the buyer. The seller turns around and sues the attorney for malpractice, claiming the attorney breached his standard of conduct. By the time the matter goes to trial, the claim for damages exceeds the attorney’s malpractice insurance coverage limits.

This nightmare was a four-year reality …

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.…

Ohio Financial Institutions Tax – Draft Regulations

The Ohio Department of Taxation recently released draft administrative regulations (the “Regulations”) designed to implement the new Ohio financial institutions tax. The new tax takes effect Jan. 1, 2014 and replaces the corporation franchise tax and dealers in intangible tax, which financial institutions have historically paid in Ohio.

The Regulations state that the tax has been designed based upon two fundamental concepts:

  1. The tax return will be reported on a consolidated basis at the highest level of ownership rather than on a separate entity basis.
  2. The equity of the consolidated reporting group will be based upon generally accepted accounting principles reported to the appropriate federal regulatory agency rather than on a federal income tax basis.

The most significant aspects of the Regulations deal with how financial institutions will file tax returns to pay the tax. Bank organizations that are owned through a holding company structure will report the equity of the holding company and all of the entities over which the bank holding company exercises significant influence on a form called an “FR Y-9.” A financial institution that is required to file the FR Y-9C pursuant to Federal Reserve Board regulations will instead report the total equity capital from its …

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.” …

Ohio Legacy Trusts

Ohio is now one of a number of states with a so-called “asset protection” statute. Bankers with trust authority might view this development favorably because it may be another possible service line, and indeed Ohio trust companies and Ohio trust lawyers were the main proponents of the statute.  Other bankers however, may encounter the statue as a roadblock in their collection efforts, to their dismay. The new statute was effective March 27, 2013.

Essentially, the statue creates another way to attempt to shield assets from creditor claims. Traditional spendthrift trusts provide such a shield, as does the incorporation of a business or the formation of a limited liability company. There are continuing questions about the effectiveness of asset protection trust statutes like the Ohio Legacy Trust Act. More on this later.

Here is a summary of how the statute works.  A person referred to as the “transferor” transfers assets in what the statute calls “qualified dispositions” to an irrevocable trust and, indeed the point of the statute, is that the transferor can still benefit from those assets through actions of a “qualified trustee,” which must be an Ohio trust company. A benefit might be, for example, a transfer annually of a portion of the trust. In short, …

What Goes Up…Quick Glance #2 at Ohio Oil and Gas Leases in Bankruptcy

As Ohio enjoys its latest boom in oil and gas exploration, it is important to understand how oil and gas leases are treated in bankruptcy.  The importance of these issues are underscored by the frequency with which the courts confront them; hence we visit again this unsettled area and consider further the question of the ownership of unextracted oil and gas in a bankruptcy context.

In the recent case of In re Cassetto, 475 B.R. 874 (Bankr. N.D. Ohio 2012), a bankruptcy court for the Northern District of Ohio examined whether a bankruptcy trustee charged with administering the assets of an individual chapter 7 debtor could enter into an oil and gas lease despite the debtor’s objections, and, if so, whether the debtor’s homestead exemption would apply to the signing bonus for such lease.

The lease the trustee sought to enter into had a five year term and would permit the extraction of oil and gas in exchange for a $3,900 per acre signing bonus and royalties of 17.5% of the value of any oil and gas produced from the property.  The trustee sought to enter into the lease, receive the signing bonus and thereafter abandon the lease to …

10th District Court of Appeals Upholds Subordination and Flow Down Provisions in Commercial Construction Documents

On March 29, 2013, the Court of Appeals for the 10th Appellate District in Columbus issued a decision of significance for mortgage lenders that rely on contractual subordination and flow down provisions in construction contracts. 

In KeyBank Natl. Assn. v. Southwest Greens of Ohio, L.L.C., 10th Dist. No. 11AP-920, 2013-Ohio-1243, the 10th District Court of Appeals upheld the September 14, 2011 decision by Judge John Bessey of the Franklin County, Ohio Common Pleas Court that the plaintiff lenders (the "Lenders") had priority over the subcontractors/ mechanic’s lien claimants even though the lenders recorded their mortgage subsequent to the notice of commencement’s recording.  The decision is significant because during this period fraught with contested foreclosures and inter-creditor disputes over priorities in real estate, the 10th District has affirmed Ohio’s broad construction and consistent enforcement of flow down provisions in construction documents.

In the spring of 2008, defendant Columbus Campus, LLC ("Campus") contracted with a general contractor to construct a continuing care retirement community on 88 acres in Hilliard, Ohio.  On March 10, 2008, Campus filed a notice of commencement; on April 16, 2008, the Lenders executed a $90 million construction loan agreement with Campus secured by …

Perfecting Security Interests in Assets of Ohio Gas and Pipeline Companies

With the recent boom in Ohio’s oil and gas industry, secured creditors in Ohio should be sensitive to special statutory requirements for perfecting security interests granted in assets of gas and pipeline companies.

Although security interests in personal property and fixtures are most frequently perfected by filing financing statements under the UCC, there are several types of security interests which require perfection through other channels.  In Ohio, pursuant to Section 1701.66 of the Revised Code, security interests in property of “public utilities” are among the interests that must be perfected by other means. “Public utility” is defined by the Ohio Revised Code Sections 4905.02 and 4905.03 to include, among others and with certain exceptions, (i) gas companies and natural gas companies, when engaged in the business of supplying artificial or natural gas, as applicable, for lighting, power, or heating purposes to consumers within Ohio and (ii) pipe-line companies, “when engaged in the business of transporting natural gas, oil or coal or its derivatives through pipes or tubing, either wholly or partly within [Ohio], but not when engaged in the business of the transport associated with gathering lines, raw natural gas liquids, or finished product natural gas liquids.” (Emphasis added).  Additional …

The Mystery of Mineral Rights: A Lesson for Lenders

By now, you have probably heard about some of the changes in title policies and title searches caused by the recent oil and gas activity in Ohio.  Title insurers also recently added to their policies a standard exception for any “lease, grant, exception or reservation of minerals or mineral rights.”

Essentially, this language means that any separate mineral interest created at any point in time by any party is now an exception to the title insurance policy, regardless of whether it is expressly disclosed.  In other words, there will be no coverage offered whatsoever if one of those interests negatively impacts the property in the future, even if it was not specifically disclosed in the policy.  And because title insurers will not insure against oil and gas interests, there isn’t much incentive for them to include such interests as exceptions in their title searches, especially when the cost of obtaining such information can be staggering.…

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