Banking and Finance Law Report

Porter Wright shares its Top 5 Ohio Construction Law Cases from 2012

Grant Stephenson — Fri, 17 May 2013 08:00:27 -0600

Recently, Porter Wright's Construction Practice team shared a Construction Law Bulletin detailing the Top 5 Ohio Construction Cases of 2012. The year produced several major construction law cases that informed financial institutions must consider in doing business with participants in the industry when Ohio law applies to the relationships. Read our Top 5 Ohio Construction Cases of 2012

SEC and CFTC Red Flag Rules Become Effective May 20, 2013

Jack J. Gravelle — Tue, 14 May 2013 06:05:20 -0600

The Securities and Exchange Commission and the Commodity Futures Trading Commission have adopted rules that require most broker-dealers, mutual funds, investment advisers, and certain other regulated entities to create programs to prevent identity theft. The new rules become effective May 20, 2013, and entities regulated by the new rules must comply by November 20, 2013.

Regulated entities subject to the rules must develop identity theft prevention programs to detect “red flags” signaling potential identity theft, to respond appropriately to such red flags, and to periodically update detection programs as identity theft risks change.

Among other requirements, the Red Flag Rules apply to “financial institutions” that offer or maintain “covered accounts.” “Covered accounts” are defined broadly to include personal accounts designed to permit multiple transactions and any account with a reasonably foreseeable risk of identity theft to customers. “Financial institutions” include any entity that holds a transaction account belonging to a consumer on which the account holder can make withdrawals to pay third parties. Examples cited by the SEC include:

a broker-dealer that offers custodial accounts;
a registered investment company that enables investors to make wire transfers to other parties or that offers check-writing privileges; and
an investment adviser that directly or indirectly holds transaction accounts and that is permitted to direct payments or transfers out of those accounts to third parties.

Many of these entities likely have identity theft prevention programs because they were previously required by Federal Trade Commission rules; however some entities, such as investment advisers, may have avoided scrutiny of their programs due to lax enforcement and may face increased attention now that the SEC and CFTC are charged with enforcing the Red Flag Rules for these entities.

Regulated entities should evaluate current red flag programs in the context of the SEC’s and CFTC’s new enforcement duties to determine if improvements are needed.

Ohio's 10th Appellate District Finds Debtor Lacks Standing to Challenge Assignee's Power to Enforce Loan Documents

Polly J. Harris — Wed, 08 May 2013 06:07:01 -0600

In a decision that will hearten commercial lawyers, on April 23, 2013, Ohio's Court of Appeals for the Tenth Appellate District relied on lack of standing to reject a mortgagor's attempt to avoid the consequences of his undisputed payment default by accusing the mortgagee, which was the assignee of his note mortgage, of lacking standing and using robo-signers. See Deutsch Bank National Trust Company, as Trustee for Argent Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2006-M1 c/o American Home Mortgaging Servicing, Inc. v. John Whiteman, 10^th Dist. No. 12 AP-536, 2013-Ohio-1636. In so doing, the court followed other Ohio state and federal courts in holding that a debtor/ mortgagor lacks standing to challenge the validity of assignments from the original creditor/ mortgagee.

Plaintiff Deutsch Bank National Trust Company, as Trustee for Argent Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2006-M1 c/o American Home Mortgaging Servicing, Inc. (the "Bank") was the assignee of a note and mortgage from John Whiteman ("Whiteman") to Argent Mortgage Company, LLC ("Argent"). Five years after the note and mortgage were assigned to the Bank, Whiteman defaulted in payment on the note securing the mortgage and the Bank filed a foreclosure action against him.

When Whiteman failed to answer the complaint, the Bank obtained a default judgment and scheduled a sheriff's sale. Before the sale was held, Whiteman filed a motion for relief from the default judgment under Ohio Civil Rule 60(B); the motion was granted in no small part because Whiteman did not serve the motion on the Bank. After Whiteman notified the court that he had not served the motion on the Bank, the Bank successfully moved to vacate the order granting Whiteman's 60(B) motion, which was then fully briefed and denied without a hearing, as was Whiteman's motion to dismiss under Ohio Civil Rule 12(B)(1).

On appeal, Whiteman asserted that the trial court abused its discretion in denying his 60(B) motion without a hearing and erred in denying his 12(B)(1) motion to dismiss because there was no justiciable controversy between himself and the Bank.

The Tenth Appellate District rejected both assignments of error. Whiteman alleged that his "meritorious defense" under Civil Rule 60(B) and the three-pronged test set forth in GTE Automatic Electric v. ARC Industries, 47 Ohio St.2d 146 (1976) was that the Bank was not the owner and holder of the note and mortgage when it filed the foreclosure complaint, and that it submitted fraudulent proof of ownership when it filed the complaint. He further claimed that had he been granted a hearing, he could have challenged the authenticity of the Bank's documentation.

The Appellate Court rejected Whiteman's challenge based on his lack of standing, holding that "because a debtor is not a party to the assignment of the note and mortgage, the debtor lacks standing to change their validity" {¶17}, citing LSF6 Mercury REO Invests. Trust Series 2008-1 c/o Vericrest Fin., inc. v. Locke, 10^th Dist. No. 11AP-757, 2012-Ohio-4499, Bank of New York Mellon Trust Co. v. Unger, 8^th Dist. No. 97315, 2012-Ohio-1950 and Bridge v. Aames Capital Corp., Case No. 1:09 CV 2947 (N.D. Ohio 2010).

The Court further observed that the allegedly "invalid mortgage assignments did not alter the homeowners' obligations under the note and mortgage" {¶18}. Notably, Argent, the original creditor/ mortgagee and the Bank, the assignee/ foreclosing creditor/ mortgagee did not dispute the validity of the assignment between them; in addition, Whiteman's payment default was undisputed.

The appellate court also affirmed the trial court's denial of Whiteman's Civil Rule 60(B) motion on procedural grounds. Whiteman alleged that because the Bank did not own that note and mortgage when it filed the foreclosure, it commitment fraud justifying relief from judgment under Civil Rule 60(B)(3). However, the appellate court distinguished between fraud that prevents the losing party, here Whiteman, from fully and fairly presenting his claim or defense, which does justify relief under Civil Rule 60(B)(3), and fraud that actually serves as the basis for a claim or defense, which does not justify relief from judgment. Here, there was no allegation that the Bank prevented Whiteman from fully and fairly presenting his claim or defense. Whiteman defaulted, plain and simple. He could have, but did not, answer the complaint. Because the Bank did not prevent Whiteman from presenting his fraud defense, he was not entitled to relief under Civil Rule 60(B).

The appellate court also rejected Whiteman's claim that, due to the allegedly invalid assignment, the trial court lack of subject matter jurisdiction and therefore erred in denying his motion to dismiss under Civil Rule 12(B)(1), holding that a lack of standing does not deprive a court of subject matter jurisdiction.

The Bank was represented by Matthew J. Richardson of Manley Deas Kochalski, LLC; Whiteman was represented by Marc E. Dann and Grace Doberdruk of Dann, Doberdruk and Harshman, LLC.

An Ohio Supreme Court "Trifecta" of Noteworthy Lending Cases on the Docket

Brad Hughes — Thu, 02 May 2013 06:13:19 -0600

At the end of April, the Ohio Supreme Court agreed to hear three notable cases that readers of this blog may wish to monitor – or perhaps even participate in as amici curiae. First, the Court has agreed to resolve a conflict among Ohio’s appellate districts regarding whether the Statute of Frauds precludes a foreclosure defendant from asserting an oral forbearance agreement as a defense. Next, the Court has agreed to answer a question certified from federal court as to whether Ohio recognizes the tort of “wrongful attempted foreclosure.” Third, the Court has agreed to hear a payday-lending case that has attracted media attention, concerning the interplay between Ohio’s Mortgage Lending Act and the more recent Short-Term Lender Law. For additional information about these three cases, read more here.

The three noteworthy lending cases that the Ohio Supreme Court accepted on April 24 reflect three distinctly different ways that the Supreme Court resolves questions of significance to our readers: (1) certified-conflict cases, in which one of Ohio’s appellate district courts certifies that its decision conflicts with that of one or more other appellate districts; (2) certified-question cases, in which a federal court asks the Supreme Court to answer a question of Ohio law for which there is no controlling precedent; and (3) discretionary appeals, in which the Supreme Court agrees to resolve a question of public or great general interest.

FirstMerit Bank, N.A. v. Inks

In the certified-conflict case, FirstMerit Bank, N.A. v. Inks, Supreme Court Case No. 2013-0091, the Supreme Court has determined that a conflict exists among Ohio’s appellate districts about whether the Statute of Frauds bars a foreclosure defendant from asserting an oral forbearance agreement as a defense. 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 agreement with the LLC. The trial court concluded that this argument was barred by Ohio’s Statute of Frauds, and the Slymans and Inkses appealed from that decision as well. The Ninth District reversed the trial court’s decision on the Statute of Frauds, saying:

By its plain language, the [Statute of Frauds] prohibits a party from “bringing an action on a loan agreement” unless the agreement is in writing. In this case, the Slymans and Inkses did not attempt to “bring an action” against FirstMerit, they merely raised the oral forbearance agreement as a defense to FirstMerit’s action against them.

FirstMerit asked the Ninth District to certify a conflict between its decision and that of multiple other appellate districts, and the Ninth District agreed that its judgment conflicted with that of Ohio’s Tenth District Court of Appeals more than a decade ago in Nicolozakes v. Deryk Babrield Tangeman Irrevocable Trust, 10^th Dist. No. 00AP-7, 2000 WL 1877521 (Dec. 26, 2000). In Nicolozakes, the Tenth District held that the Statute of Frauds barred Ms. Tangeman from defending against a foreclosure action by alleging that Mr. Nicolozakes had orally released her from a note and mortgage.

If you are interested in following the FirstMerit case to see how the Ohio Supreme Court resolves this conflict about oral forbearance agreements, please stay tuned to the Banking & Finance Law Report. You can also receive e-mail updates about filings in the case directly from the Ohio Supreme Court by registering at this link. And the FirstMerit docket filings are publicly available here.

Corbett v. Beneficial Ohio, Inc.

In the certified-question case, Corbett v. Beneficial Ohio, Inc., Supreme Court Case No. 2013-0213, Beneficial Mortgage Co. is the assignee of a mortgage with Mr. Corbett. A scrivener’s error during the loan process caused the loan to be secured by Corbett’s house rather than his six-unit apartment building, as the parties intended. Corbett obtained Rule 60(B) relief in the foreclosure proceeding on this basis, the foreclosure action was dismissed, and Beneficial took no further action to collect or foreclose. Even so, Corbett sued Beneficial in a multi-count complaint sounding in fraud, attempted theft, violations of the Consumer Sales/Fair Debt Collection Practices Acts, and a separate cause of action for “wrongful attempted foreclosure.” After the case was removed to federal court, the U.S. District Court for the Southern District of Ohio sua sponte certified two questions to the Ohio Supreme Court, which the Supreme Court has now agreed to resolve:

(1) Does Ohio recognize a freestanding cause of action for “wrongful attempted foreclosure?”

(2) If so, what are the elements of such a claim, and what damages are available?

Papers filed on the Corbett docket, available here, assert that only three states currently recognize a separate cause of action for wrongful attempted foreclosure, including Georgia, North Carolina, and Massachusetts. Stay tuned to the Banking & Finance Law Report to see where the Ohio Supreme Court comes down on this question.

Ohio Neighborhood Fin., Inc., d/b/a Cashland v. Scott

The payday lending case, like the FirstMerit case described above, comes from Ohio’s Ninth District Court of Appeals, and has garnered some attention from the press, such as this article from the Cleveland Plain Dealer. In Ohio Neighborhood Fin. Inc. v. Scott,Supreme Court Case No. 2013-0103, the dispute concerns a $500 loan that Cashland made to Rodney Scott back in 2008. The Customer Agreement that Scott signed established a “one payment” schedule, under which Scott would repay Cashland $545.16 just two weeks later. When the loan was not repaid, Cashland sued, arguing that, as a registered lender under the Ohio Mortgage Loan Act (“MLA”) (R.C. 1321.51 et seq.), it was entitled to a judgment of $570.16, along with 25% yearly interest. The trial court and Ninth District Court of Appeals, however, agreed that Cashland had issued a loan not permitted by the MLA, and that by invoking the MLA, Cashland was attempting an end-run around Ohio’s 2008 Short-Term Lender Law (R.C. 1321.35 et seq.), which caps total loan amounts at $500, requires the duration of the loan to be not less than 31 days, and prohibits registrants from charging interest rates higher than 28% or additional fees (such as loan initiation fees). As the Ninth District explained in its majority opinion:

Cashland argues that, as a registrant under the [MLA], it was permitted to issue the loan in this case because the [MLA] permits single-payment loans. However, to construe [the statutes] in the manner Cashland suggests would permit the registrants under the [MLA] to issue the payday loans that the Short-Term Lender Law seeks to regulate. Cashland suggests that the General Assembly intended to allow lenders to choose between the Short-Term Lender Law and the [MLA]. If true, however, no payday lender will ever register under the Short-Term Lender Law, and payday-loan lenders would be allowed to issue loans in greater amounts and shorter durations than allowed by the Short-Term Lender Law, all the while charging fees prohibited by the Short-Term Lender Law. *** The effect would be to nullify the very legislation that is designed to regulate payday-type loans – a result at odds with the intent of the General Assembly.

Ohio Neighborhood Fin. Inc. v. Scott, 2012-Ohio-5566, ¶ 11. Dissenting, Judge Dickinson opined that “the majority has suggested that the General Assembly intended the Short-Term Lender Act to regulate this type of loan. Regardless of the intent of the General Assembly in [enacting] the Short-Term Lender Act, nothing in [that Act] prohibits a loan under the [MLA] that satisfies the requirements of the Mortgage Loan Act.” Id. at ¶ 24.

The Supreme Court has now agreed to hear Cashland’s discretionary appeal by a vote of 5-2. Notably, the retired Deputy Superintendent and Chief Examiner of the Department of Commerce’s Division of Financial Institutions filed an amicus brief urging the Court to take the case, contending that the Ninth District’s decision “threatens to overthrow Ohio’s consistent interpretation and enforcement of the MLA based on nothing more than an erroneous reading of the statute.”

As these recently accepted cases demonstrate, 2013 promises to be a meaningful year for lenders before the Ohio Supreme Court. If your organization would like to chime in on the merits of any of the foregoing cases, remember that the Court’s Rules of Practice permit participation by amici curiae, and that having your voices heard in a court of last resort on issues critical to your business can be every bit as meaningful as lobbying to be heard in the General Assembly.

U.S. Supreme Court decision: U.S. Airways, Inc. v. McCutchen

Grant Stephenson — Wed, 17 Apr 2013 11:54:41 -0600

Our colleagues at the Employee Benefits Law Report recently posted an overview of the April 16 U.S. Supreme Court decision in U.S. Airways, Inc. v. McCutchen. The decision will be of interest to bankers and other financial executives because it provides a basis for the control of health care plan costs, and premiums, at a critical time when plans are gearing up for 2014 health care reform cost increases. Read more

Nonqualified Deferred Compensation Incentives for Bank Executives

Ann Caresani — Tue, 16 Apr 2013 08:54:27 -0600

In this post, we share a few thoughts about recent developments and trends regarding nonqualified deferred compensation incentives for key bank employees. Banks are seeking ways to attract and retain talent, while ensuring that compensation arrangements are aligned with newer statutory guidance, such as the Dodd-Frank Act and Section 409A of the Internal Revenue Code (the “Code”).

409A Penalties

Code Section 409A added new rules for “nonqualified deferred compensation.” Even if an executive compensation arrangement such as an employment agreement, severance agreement, change in control agreement, or equity compensation plan does not provide “nonqualified deferred compensation,” the arrangement may be required to follow strict deferral election and payment timing rules under Section 409A.

Executives are at risk of early income inclusion, a 20% penalty tax, and interest charges if their compensation arrangements violate the evolving 409A guidance. So the first question is whether the IRS is enforcing the potentially harsh penalties, even as to parties who have made a good faith compliance effort while guidance has evolved. In a word, yes.

Consider a 2013 decision in the Court of Federal Claims, Sutardja v. United States. Stock options are generally exempted from 409A. But this case involves a stock option that was allegedly issued at a price discounted below market value, and 409A does apply to discounted options. The option was issued in December 2003, with an exercise price equal to that date’s stock price, and ratified in January 2004, on a date when the stock price was higher. Subsequently, Section 409A was enacted. In January 2006, prior to the issuance of regulations, Mr. Sutardja and his employer entered into a reformation to amend the exercise price to the higher price. Presumably they believed this was a permissible way of addressing an option that had been issued prior to the law change. Sutardja then exercised the option. Relying upon Notice 2005-1, which provided that discounted stock options were included in the definition of deferred compensation, the IRS deemed the 2006 exercise of the option to constitute a violation of Section 409A, and assessed excise tax penalties against Sutardja. (Note that regulations were not promulgated until 2007.) Sutardja appealed to the court, which rejected a number of his arguments, and announced that it would set the matter for trial on the issue of whether the stock option was discounted at the time it was granted. If the IRS is willing to pursue penalties against executives in a case like this one where there was little Section 409A guidance available and an apparent good faith attempt to correct the issue, we can only imagine how aggressive the IRS will pursue executives in other instances.

Correction of 409A Errors

Given the potential substantial costs to executives, and evolution of guidance over time, we encourage banks to review their executive arrangements on a periodic basis to determine whether their executives have exposure to any potential 409A issues. For example, if an arrangement is structured to provide for payment based on when an executive signs a release, rather than based on a fixed date, that arrangement may violate 409A. Arrangements may have been structured in that manner prior to issue of regulations. If errors are discovered, it may be possible to correct them under a correction program, or to otherwise mitigate the harsh result for the executive.

Mandatory Deferral of Annual Bonuses

Subsequent to the Trouble Assets Relief Program (“TARP”) and statutory changes including the Dodd-Frank Act, banks have begun to revise their executive compensation practices to better ensure that executive compensation is aligned with corporate goals and financial performance. One trend that is starting to develop at larger, publicly held banks (generally over $1 billion in assets) is the mandatory deferral of annual bonuses. This is viewed as a method to discourage unnecessary and excessive risk-taking, and some believe the Dodd-Frank Act rules may be revised at some point to require this.

Discretion Built Into Deferred Incentive Arrangements

Many banks have begun to build more discretion into incentive arrangements, so that they can make adjustments to awards based on unexpected circumstances. A severe downturn in economic conditions, or the discover of problems during an audit, could lead to circumstances where payment of awards would seem inappropriate. For the purposes of bank regulators and shareholders (particularly of publicly held companies, in light of Say-on-Pay), management needs to be able to explain the reasons for the discretion and demonstrate consistency in approach. Measures may include appointing a committee that develops guidelines and scorecards.

Claw-back and Recoupment

The Dodd-Frank Act requires publicly held companies to disclose their policies for recouping executive payments in the event of a financial restatement. As a result, claw-back and recoupment provisions are becoming increasingly common in deferred incentive plans. In essence, the provisions state that if the bank is required to restate its financial statements or discovers other wrongdoing after payment has been made, the bank has the authority to force the executive to repay certain amounts paid by the bank.

SERPs

A supplemental executive retirement plan (“SERP”) is a nonqualified retirement plan that provides benefits to a select group of management or highly compensated employees. These plans allow for greater employer contributions than are permitted in the 401(k) plans and other qualified plans. While many banks traditionally offered defined benefit SERPs, these plans have been criticized by regulators and shareholders as costly and not aligned with corporate goals, particularly as banks wind down their qualified defined benefit plans, and accordingly these plans are on the decline. Some banks, such as mutual banks and privately held banks that cannot issue equity awards, might consider a defined contribution SERP with performance-based contributions. A defined contribution SERP is structured somewhat like a 401(k) plan, with employer contributions, with vesting and other provisions.

Summary

Banks have numerous tools available to them for offering nonqualified deferred compensation incentives to help recruit and retain key executives, and need to ensure that these arrangements are properly designed so as to comply with applicable law and align the executives with corporate goals. If you have not reviewed your programs recently, this might be a good time to consider whether the programs are up-to-date, and effective.

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

Andy Nicoll — Mon, 15 Apr 2013 11:43:48 -0600

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 the debtor such that the debtor would be entitled to any royalty payments under the lease.

The debtor objected to the lease claiming that “(i) there are alleged environmental issues associated with hydraulic fracking; (ii) even without any environmental concerns, the massive machinery and noise would impair the use and enjoyment of the homestead and devalue the Debtors' property (iii) the Debtors' interest in the oil and gas is ‘unsevered’ from the Real Estate; and (iv) in the alternative, [the debtor] is entitled to her Homestead Exemption” from the signing bonus.

The court quickly dispensed with the first two issues finding that the debtor’s claims to environmental issues were “unspecific and unsupported,” and similarly that the debtor had offered “no support for the proposition that the alleged impairment in use and enjoyment and/or diminution in value of the Real Estate is sufficient reason to prohibit the Trustee from maximizing the value of the bankruptcy estate.”

As to the debtor’s third and fourth grounds for objection, the debtor argued that, because the oil and gas rights had not been severed from the debtor’s residential property, such oil and gas rights were subject to her homestead exemption. Relying on the case of In re Thexton, 39 B.R. 367 (Bankr. Kan. 1984) (applying Kansas law), the debtor argued that the homestead exemption prevented the trustee from entering into the lease. The court, however, explained that, while under Kansas law, a homestead exemption would apply all future royalty payments under an oil and gas lease, “the homestead exemptions in Kansas and Ohio are in no way similar.”

Relying heavily on the decision in In re Loveday, No. 10-64110, 2012 WL 1565479 (Bankr. N.D. Ohio May 2, 2012) (for a discussion of Loveday, see our previous blog post HERE), the court held that, despite a split among Ohio state courts, the better view of the ownership of unextracted oil and gas “recognizes the migratory nature of oil and gas, and requires actual possession to establish ownership of the resource, and the right held by the landowners is the right to reduce the oil and gas to possession or to sever this right for economic consideration” (referred to as the “nonownership theory”). Thus, under the nonownership theory:

[B]ecause the oil and gas rights cannot be valued until they are either removed from real estate or there is, at minimum, an offer to purchase the right to remove the oil and gas, the Homestead Exemption cannot apply to such rights. The Homestead Exemption exempts certain property of a debtor—up to a specified dollar amount—from execution by a creditor. If the oil and gas rights cannot be valued, how can a creditor know if the rights constitute an asset? How can a creditor execute on unvalued oil and gas rights? If a value cannot be placed on the property right, how can one know if the specified dollar exemption applies? Indeed, until oil and gas rights are valued by removal of the oil and/or gas or an agreement to remove, it is impossible to ascertain whether such alleged rights have any value.

….

Moreover, the Homestead Exemption does not apply to oil and gas once these resources are severed from the realty because, at that time, such oil and gas become personal property and cannot be part of the homestead.

Furthermore, the court noted that the only real question is whether the signing bonus is subject to the homestead exemption. The court explained that “[t]he Signing Bonus is separate and apart from the unsevered oil and gas rights,” and held that the signing bonus constitutes personal property. Because it is personal property, a simple judgment lien would not attach to the signing bonus and in a related fashion, neither would Ohio’s homestead exemption. Accordingly, the trustee was authorized to enter into the lease.

The Cassetto decision, case like Loveday, serves to highlight the far reaching implications of the determination of whether unextracted oil and gas is owned by the landowner or not. Different states have answered this question in different ways, and, while Ohio courts are split on the issue, the clear trend among the state’s bankruptcy courts is to recognize the nonownership theory of oil and gas rights, which requires extraction of oil and gas to establish ownership.

Financing in the Energy Sector: A Primer for Lenders

Grant Stephenson — Fri, 12 Apr 2013 11:06:14 -0600

We hope you enjoyed the four-part series on energy financing that has run in the Banking & Finance Law Report blog during the past few weeks. We've compiled those articles into a resource that's relevant to anyone involved with lending or borrowing in the energy sector. Be sure to download the Energy Financing eBook, and feel free to forward it to colleagues who also will be interested.

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

Polly J. Harris — Fri, 05 Apr 2013 06:22:01 -0600

On March 29, 2013, the Court of Appeals for the 10^th 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., 10^th Dist. No. 11AP-920, 2013-Ohio-1243, the 10^th 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 10^th 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 a mortgage on the 88-acre property; the Lenders recorded their mortgage on April 22, 2008. By March, 2009, the Lenders had disbursed approximately $45 million of the loan proceeds pursuant to various draw requests, $27 million of which was paid to the general contractor and various subcontractors.

In the spring of 2009, Campus defaulted on its loan from the Lenders, and in July, 2009, the Lenders filed suit in Franklin County Common Pleas Court (Case No. 09 CV 9921) seeking money judgment, a judgment decree in foreclosure and the appointment of a receiver. Campus consented to all three in July, 2009. As the mechanic's lien claimants (subcontractors and the general contractor) filed their answers, it quickly became apparent that there was a priority dispute between the mechanic's lien claimants and the Lenders. By October of 2009, Campus and its owner/ guarantor, Erickson Retirement Communities, LLC ("Erickson") had filed for bankruptcy protection in Texas.

The parties briefed their priority dispute on cross-motions for summary judgment in early 2011, and on September 14, 2011, Judge Bessey ruled in favor of the Lenders vis-à-vis the subcontractors, finding that (1) the subcontractors had contractually agreed to subordinate their lien claims to the Lenders' mortgage and (2) R.C. §1311.14, also known as the construction mortgage statute, provided the Lenders' mortgage priority over the subcontractors' mechanic's liens. Judge Bessey journalized his decision in an entry filed on October 4, 2011; the cross motions for summary judgment between the Lenders and the general contractor remain pending with the trial court.

The 10^th District Court of Appeals reviewed the trial court's ruling de novo, and affirmed its decision. The 10th District found that the subcontractors had agreed to be bound by the subordination provisions of the prime contract between the general contractor and Campus by virtue of the "flow down" provisions in the subcontracts that, the court found, sufficiently incorporated the prime contact into the subcontracts. The 10^th District also specifically rejected the subcontractors' narrow reading of the flow down provision to limit its application to only those provisions of the prime contract that related to the scope, quality, character and manner of the subcontractors' work, finding that the subcontracts incorporated the entire prime contract, including its subordination provision, noting that "Ohio courts have broadly construed subcontract flow down provisions." KeyBank Natl. Assn. v. Southwest Greens of Ohio, L.L.C., 2013-Ohio-1243, ¶35.

Having affirmed the trial court's ruling on the contractual subordination claim, the 10^th District found the Lenders' statutory claim to lien priority under R.C. §1311.14 was moot. Finally, the 10^th District affirmed the trial court's order granting the Lenders' unopposed motion to strike an attempt by the subcontractors to, after briefing on summary judgment had closed, introduce evidence that the Lenders had obtained a title insurance policy. The 10^th District found no abuse of discretion in the trial court's reliance on Evidence Rule 411, which provides that evidence of insurance is not relevant on the issue of whether the insured acted negligently or otherwise wrongfully.

The Lenders are represented by the Columbus, Ohio office of Porter Wright Morris & Arthur LLP, including Jack Pigman, Polly Harris, Craig Carlson, Bradford Hughes, Andrew Nicoll, Ryan Sherman, Christen Blend and Gale Heaney. Please contact Polly Harris at 614.227.1962 or pharris@porterwright.com with questions.

Due Diligence in Lending to the Oil and Gas Industry

Christopher Baronzzi — Fri, 29 Mar 2013 08:12:40 -0600

Although 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. We advise our lending clients to conduct diligence in the oil and gas industry in the same manner as if they were buying the company, perhaps just not to the same degree, because lenders typically have some collateral to help them recover a portion of their investments from oil and gas customers that stumble. Nevertheless, lenders need to understand the world of oil and gas if they wish to avoid mistakes and prosper.

First, lenders must understand that the shale oil and gas revolution has inspired a new generation of entrepreneurs, some of whom are making their first foray into the oil patch. This entry will be difficult for companies with little or no experience or existing relationships. Even well-established oil and gas companies may know very little about the laws, regulations, and geology of Ohio. To properly evaluate risk, the lender's first task is to learn about its prospective borrower. Does the prospective borrower have experience in the industry, with this particular play, in this state, or with a given technology, such as drilling horizontal wells? Do they understand the regulations applicable to their businesses? These are just a few of the critical questions lenders should ask.

A lender should also consider the economic and business climate to determine whether the borrower's budget and estimated time to complete a project are reasonable. Regulatory bottlenecks and shortages of supply should be expected as the shale revolution sweeps across the country. For example, in 2012 unusual demand for guar gum, used as a thickening agent in drilling mud, sent prices to more than ten times their usual level and cut into the bottom line of operators. Likewise, insufficient pipelines and refining capacity in northeast Ohio have forced oil and gas operators to shut in dozens of wells that would otherwise be producing. These kinds of issues should be anticipated by an experienced borrower and a savvy lender.

Next, lenders need to understand the language of oil and gas and what is meant by a 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. These are just a few terms that are commonly used to define the rights and obligations of parties to an oil and gas transaction. Like any language, one learns the language of oil and gas through education and experience.

Lenders must also understand the assets unique to the oil and gas industry. For example, the primary assets of many oil and gas companies are leases, wells, royalties, reserves, and contractual arrangements. Under applicable law, these assets may be treated as real estate, mineral rights, as-extracted collateral, general intangibles, accounts, equipment, fixtures, production payments, net-profits interests, partnership interests, royalties or a combination of the foregoing. The value and nature of these types of assets is more difficult to measure than typical equipment, inventory, and real estate. The value of oil and gas assets can fluctuate significantly depending on commodity prices, contract law, regulations, and the solvency or experience of the operator. A lender should understand the various categories of reserves, including "unproved possible reserves" on one end of the spectrum, and "proved developed reserves" on the other, how these reserves can change, and how such a change can affect an oil and gas company's balance sheet.

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. Federal and state agencies, judges and legislators have been scrambling to keep pace with the advance of technology. The result has been many new laws, decisions and proposals within the last few years that have serious consequences for the oil and gas industry. For example, within the last year judges have ruled on such critical issues as whether a local government has the authority to regulate oil and gas drilling, whether drilling permits can be appealed, and whether payment of a delay rental effectively maintains a lease. Likewise, the Ohio legislature has passed sweeping changes to Ohio oil and gas statutes in each of the last three years, and a new round of legislation is pending. State and federal agencies have been just as busy.

Experienced counsel can also advise a lender about specific kinds of due diligence and whether other consultants, such as a petroleum geologist or environmental consultant, should be engaged. For example, in many oil and gas transactions, leases and existing wells are the primary asset being transferred or they are the lynchpin to all further activities and development. Experienced oil and gas counsel will know how to search and interpret agency records for existing wells, what problematic lease provisions to look for, and other common pitfalls that should be detected and avoided.

Lenders often employ unique lending concepts for the oil and gas industry, such as reserve-based financing, project financing, or mezzanine financing with an equity kicker (often in the form of an overriding royalty interest), or volumetric production payment financing. All of these arrangements have been developed to account for special attributes of the oil and gas industry and oil and gas assets. Lenders need to develop a working knowledge of these tools.

Overall, the key to successfully lending to the oil and gas industry is being part of the industry by learning to speak the language, knowing the business climate, understanding the regulatory and legal structure and, of course, doing the proper due diligence on your prospective borrower.

Perfecting Security Interests in Assets of Ohio Gas and Pipeline Companies

Amy Strang — Fri, 22 Mar 2013 07:34:26 -0600

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 discussion about this distinction among pipeline companies follows.

Revised Code Section 1701.66, titled “Recording of Railroad or Public Utility Mortgages,”provides for a special method for perfecting security interests in the assets of a public utility or a corporation organized for the purpose of constructing, acquiring, owning, or operating a public utility. This section requires mortgages of “property of any description, or any interest in the property” made by public utilities to be recorded in the office of the county recorder of each county in which any of that property is situated or employed. A mortgage by a public utility including rolling stock or movable equipment may be filed in the secretary of state’s office, and will have the same effect as if filed in the county recorder’s office. Any public utility mortgage that is filed as provided in Section 1701.66(A) is a lien on the property described from the respective times of filing the mortgage with the recorders of the appropriate counties (or secretary of state, as to rolling stock or movable equipment). A public utility mortgage encumbering after-acquired property becomes a lien on such after-acquired property from the date of its acquisition by the public utility debtor, so long as the public utility mortgage was recorded as provided above.

(Note: As used in Section 1701.66, the term “mortgage” is most likely used in its older sense to include security interests in personal property. Section 1701.66 refers to public utility mortgages including specific personal property (rolling stock and movable equipment), and provides for perfection of security interests in after-acquired property, which is generally impermissible in mortgages of real estate.)

Section 1701.66(E) provides that public utility mortgages do not need to be otherwise filed or refiled as is required for other security interests under Article 9 of the UCC. Additionally, Revised Code Section 1309.109, which defines the scope of UCC Article 9 in Ohio (with respect to both personal property and fixtures), states that it does not apply to liens created under any provision of Section 1701.66 (except with respect to a provision regarding priority of possessory liens).

Under the statutory framework, it appears that security interests in assets of pipeline companies that are not public utilities are perfected using the same method as other interests under UCC Article 9. Pipeline companies engaged in the business of transport associated with “gathering lines, raw natural gas liquids, or finished product natural gas liquids” are not public utilities. “Gathering lines” is given the same definition as in the Natural Gas Pipeline Safety Act (49 U.S.C. Chapter 601), meaning a pipeline that transports gas from a current production facility to a transmission line or main. “Raw natural gas liquids” generally include mixtures of ethane, propane, butanes, and natural gasoline, and “finished product natural gas liquids” include ethane, propane, iso-butane, normal butane, and natural gasoline.

Secured creditors lending to oil and gas companies should consult experienced legal counsel to ensure they use the proper methods to effectively perfect their security interests in collateral owed by gas and pipeline companies.

The Mystery of Mineral Rights: A Lesson for Lenders

Matt Moberg — Fri, 15 Mar 2013 11:15:50 -0600

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.

Even if a title insurer could be persuaded to remove the aforementioned exceptions, many mineral interests were granted in the first half of the 20th century, which is farther back than the average title search extends. These topics are discussed in-depth in a two-part post published previously on the Oil & Gas Law Report blog. Read part one and part two.

Today's topic focuses on what the above changes mean for lenders. The existence of a severed mineral interest or an oil and gas lease is of consequence to lenders because those interests have the potential to significantly decrease the value of the mortgaged property. A severed subsurface mineral interest is the dominant estate when compared to the surface, and impliedly includes the right to use as much of the surface area as is reasonably necessary to enjoy the subsurface rights. Subsurface leases (most often oil and gas leases) will often expressly convey similar rights to the lessee, and could contain terms and conditions rather unfriendly to the surface owner. In practice, this means that the owner of valid subsurface rights on a particular parcel could theoretically build roads, install pipelines or construct a drilling pad on the mortgaged property. Although often the potential for royalties might offset some of this devaluation or risk, the ultimate surface rights claimed by the owner of the mineral estate do have the potential to significantly decrease the value of the mortgaged property.

How this type of operation could devalue a property should be fairly obvious. And some leases prohibit the landowner from building on, digging in and even landscaping over a certain portion of the land. The discovery that such a prohibition exists over a critical portion of the property could severely limit the uses that can be made of the property as well as the number of potential buyers and, in turn, the value of the collateral.

Given the state of affairs in the realm of title insurance, what can lenders do to protect themselves short of refusing to extend credit in resource-rich regions? Most obviously, lenders can no longer rely on standard title insurance to protect against devaluations in mortgaged land caused by unknown mineral interests, or even to reveal the existence of those interests. Ideally a lender would find a way to persuade a title company to remove the standard mineral exceptions mentioned above; but, unfortunately, that result is exceedingly unlikely and may well be impossible under today's underwriting standards.

Assuming there is no title insurance to be had, lenders should obtain as much information as possible about the mineral interests applicable to the collateral property. This information can help lenders assess their risk levels with respect to any given property. For example, lenders should search for a title insurer who will include mineral interests in the title search, even if it refuses to insure against those interests. And the lender should request that the title search extend back at least 100 years rather than the standard 40 or 60 years. But both of these additional services will be accompanied by additional fees.

Another option is to retain a company specializing in searches designed to turn up severed interests and oil and gas leases. However, this option is typically recommended for large-scale projects so it may not be a viable option for lenders who do not issue a large volume of mortgages. Finally, lenders can search oil well records with the Ohio Department of Natural Resources and/or conduct physical due diligence (i.e., a site walk) to determine whether there are any active wells on the property.

All these options are less than satisfying, and lenders will need to get creative to protect themselves from the hidden perils of undisclosed mineral interests.

What Goes Up ...A Quick Glance at Ohio Oil and Gas Leases in Bankruptcy

Andy Nicoll — Mon, 04 Mar 2013 09:35:16 -0600

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. Unsettled Ohio law regarding whether a debtor owns unextracted oil and gas as part of the debtor's real property can make this a difficult issue.

In In re Loveday, No. 10-64110, 2012 WL 1565479 (Bankr. N.D. Ohio May 2, 2012), the Northern District of Ohio examined whether a Chapter 13 debtor had properly included in his bankruptcy schedules his interest in unextracted oil and gas relating to the debtor’s real property. Whether the debtor’s oil and gas rights were properly scheduled was a significant factor in determining whether the debtor could retain the proceeds of the sale of his oil and gas rights. But more importantly, for the companies who sought to purchase the debtor's oil and gas rights, knowing whether such rights were properly scheduled was necessary to determine whether the debtor had unfettered authority to sell his oil and gas rights without court approval.

The Loveday debtor argued that his oil and gas rights were properly scheduled because these rights were part of his real property, which real property he had listed in his bankruptcy schedules. By operation of law and the debtor’s Chapter 13 plan, all the debtor’s interest in his properly scheduled assets were vested with the debtor on confirmation of his Chapter 13 plan. Thus, as the debtor argued, because his oil and gas rights were inherently part of his properly scheduled real property, such oil and gas rights were scheduled and the debtor was empowered to sell such rights and entitled to retain the proceeds from the sale.

In testing the debtor’s argument, the bankruptcy court outlined two prevailing theories on oil and gas rights -- one holding that an owner of real property holds a fee right in unextracted oil and gas that may be severed, and the other holding that rights to oil and gas require actual possession to establish ownership in such oil and gas, and a landowner has the right to reduce the oil and gas to possession or to sever this right for economic consideration. The court found that the “[c]ourts in Ohio are split regarding the treatment of oil and gas rights to an owner,” but determined that “the nonownership theory is the more sensible approach to the ownership of oil and gas rights for purposes of valuation in bankruptcy.” The court further explained that, “[g]iven the migratory nature of oil and gas, it is premature to give value to the oil and gas before they are extracted from the Land,” and held that:

In instances where a debtor retains the oil and gas rights to his property, he has a duty to disclose the retention of these rights on his schedules. … [T]the debtor cannot assert that the oil and gas rights are included in the value given to the real property on his schedules. When a debtor schedules real property, the court assumes that the debtor refers only to the top surface rights associated with the real property unless the debtor specifically schedules the retention of other rights associated with the real property. Given how many different rights can be associated with real property, e.g. easements, oil and gas rights, and countless other rights, a debtor need only indicate whether any of these rights have been conveyed, specifically listing which have been conveyed, or indicate that all rights associated with the real property are still retained.

Because the debtor had failed to expressly indicate that his scheduled real property included oil and gas rights, he was required to obtain court approval to sell such rights and retain the proceeds of the sale.

In practice, it would be unusual to find oil and gas rights separately scheduled or expressly noted on a Chapter 13 debtor’s bankruptcy schedules. Thus, purchasers of such rights would be wise to condition their acquisition of oil and gas rights on approval by the Chapter 13 debtor’s bankruptcy court unless the oil and gas rights are explicitly and unambiguously scheduled.

First-to-File Patent System Arrives March 16, 2013

Martin Miller — Fri, 22 Feb 2013 07:40:40 -0600

With significant changes to law governing how the U.S. grants patents taking effect next month, Porter Wright recommends that all clients consider filing any contemplated patent applications by March 15. This includes filing non-provisional patent applications, and in some cases Patent Cooperation Treaty (PCT) patent applications, that are based upon any provisional or non-U.S. patent application filed since March 2012. Though there are some exceptions to this advice, waiting until after March 15 may be problematic.

In brief: For patent applications having any claim with an effective filing date after March 15, it will no longer be possible to overcome prior art by showing an earlier date of invention. Thus, the prior art for purposes of patentability will include: 1) third-party public disclosures of any kind, anywhere in the world, prior to your effective filing date; and 2) issued U.S. patents and published U.S. or PCT patent applications that were effectively filed before your effective filing date. In addition to not being able to "swear behind" a prior art reference by proving an earlier date of invention, the prior art date for patents and published patent applications may be as much as 18 months earlier than under current law because of foreign priority claims.

It is also important to note that inventors will not lose the benefit of any earlier provisional or non-U.S. patent application should they wait until after March 15 to file. Any claims that are adequately supported in the earlier filing will be entitled to that earlier filing date for purposes of patentability. However, if even one claim in the post-March 15 application is new (i.e., includes subject matter not disclosed in your earlier application) the new first-to-file rules will apply to all claims — and there will be no way to alter this scenario through actions such as deleting claims containing the new subject matter.

A Porter Wright Law Alert describes these patent law changes in greater detail.

Ohio Passes Legislation Preventing Recovery on "Cherryland" Insolvency Carveouts in Nonrecourse Loans, Among Other Changes

Amy Strang — Mon, 28 Jan 2013 11:21:16 -0600

Bankers and their counsel should note that during its December lame-duck session, the Ohio General Assembly passed the Ohio Legacy Trust Act (Am. Sub. H.B. 479), which will go into effect March 27, 2013. The Act creates borrower-friendly provisions prohibiting the use of so-called “Cherryland” insolvency carve-outs in nonrecourse loan documents which will be of interest to all financial institutions engaged in commercial lending in Ohio.

“Cherryland” insolvency carve-outs are so named for the 2011 Michigan appellate case, Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership, in which the court upheld a widely-used provision in non-recourse loan documents that caused the loan at issue to become fully recourse to the guarantor upon the insolvency of the borrower.

The Cherryland Mall decision prompted the Michigan legislature to pass the Nonrecourse Mortgage Loan Act, which became effective in Michigan in March of 2012. In order to legislatively overturn the Cherryland Mall decision, the Nonrecourse Mortgage Loan Act provides that a post-closing solvency covenant cannot be used as a nonrecourse carve-out or as the basis for any claim or action against a borrower or guarantor on a nonrecourse loan. It also provides that any provision purporting to create such a carveout is invalid and unenforceable.

"Post-closing solvency covenant" is defined in both Michigan’s Nonrecourse Mortgage Loan Act and the Ohio Legacy Trust Act to mean "any provision of the loan documents for a nonrecourse loan, whether expressed as a covenant, representation, warranty, or default, that relates solely to the solvency of the borrower, including, without limitation, a provision requiring that the borrower maintain adequate capital or have the ability to pay its debts, with respect to any period of time after the date the loan is initially funded." The definition does not include a covenant not to file a voluntary bankruptcy or other voluntary insolvency proceeding or not to collude in an involuntary proceeding, so provisions of this sort should continue to be included where appropriate in nonrecourse loan documents.

Ohio law had not explicitly addressed the issue raised in Cherryland until the passage of the Ohio Legacy Trust Act. The Act contains language substantively identical to that of the Michigan Nonrecourse Mortgage Loan Act. The Act will add Sections 1319.07, 1319.08, and 1319.09 to the Ohio Revised Code. When effective (which is itself a matter of some complexity as described below), these sections will prohibit the use of post-closing solvency covenants as nonrecourse carveouts in a nonrecourse loan and will make 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."

Lenders using nonrecourse loans should consult legal counsel about how this new statute will affect their loans. In addition to the Cherryland Mall provisions, the Act contains a number of unrelated provisions: establishing “legacy trusts” in Ohio, increasing the personal residence exemption from execution, garnishment, attachment, or sale to satisfy a judgment from $20,200 to $125,000, effectively eliminating the rule against perpetuities in certain trusts, and changing various other trust-related provisions of Ohio law.

Supreme Court Rules of Superintendence on Commercial Dockets

Polly J. Harris — Wed, 16 Jan 2013 10:56:56 -0600

The pilot program for commercial docket courts in Ohio began in 2009, and was met with strongly positive reviews by both business lawyers and their clients, who generally experienced prompter resolution of and greater expertise in commercial cases. It now appears that what began as a pilot program will become permanent.

In late 2012, the Supreme Court Task Force on Commercial Dockets issued a final report in which it recommended the Supreme Court adopt Rules 49 through 49.12 of the Rules of Superintendence for the Courts of Ohio allowing for the permanent establishment of commercial dockets. The report found that the benefits of the program included accelerating decisions, creating expertise among judges, and achieving consistency in court decisions around the state, and it expected that these rules will be made permanent. These rules provide in part for the following:

Expansion of the Commercial Docket Program- the Rules expand the commercial docket to counties with either 6 or more general division judges or populations exceeding 300,000, although implementation of the commercial docket program remains voluntary.

More Formalized Training- while the Temporary Rules require unspecified training of commercial docket judges through the Supreme Court of Ohio Judicial College, permanent Rule 49.04(B) requires at least 12 hours of training every two years.

Balancing of Workloads- New Rule 49.09(A) represents an attempt to balance the workload of commercial docket judges and non-commercial docket judges by assigning a non-commercial docket case to a non-commercial docket judge for every commercial docket case assigned. Rule 49.09(B) also attempts to achieve balance by requiring courts of common pleas with commercial docket programs to establish local rules by either reducing the number of cases assigned to commercial docket judges by either not assigning them any fourth or fifth degree felony cases; reducing their criminal docket by 50% or by meaningfully reducing the non-commercial docket civil cases assigned to each commercial docket judge.

Deadlines for Rulings- Rule 49.11 provides that commercial docket judges are to rule on dispositive motions within 90 days from the later of the completion of oral argument or briefing, and are to rule on all other motions within 60 days of the later of the completion of oral argument or briefing. Decisions are to be made within 90 days of the submission of the case after trial.

The types of cases eligible and ineligible for the commercial docket is unchanged. Cases involving labor organizations and government entities remain ineligible for the commercial docket.

Participation in the commercial docket program is still voluntary, however, so it is unclear at this time whether the Franklin County Common Pleas Court will re-establish its commercial docket program. Perhaps the provisions of new rule 49.09(A) will address the concerns of certain judges regarding the balancing of workloads between commercial docket and non-commercial docket judges.

President Signs Bill Protecting Privileged Information Submitted to the CFPB

Amy Strang — Mon, 07 Jan 2013 07:39:56 -0600

Banks and consumers concerned about waiving attorney-client privilege can now rest easy when submitting privileged information to the Consumer Financial Protection Bureau (CFPB). Congress recently passed legislation confirming such submissions will not waive privileged status as to third parties, consistent with existing law with respect to submissions to other federal banking agencies.

On December 20, 2012, President Obama signed H.R. 4014, protecting privileged information submitted to the CFPB, a federal supervisory entity created by the Dodd-Frank Act of 2010. The bill was passed by the House in March and by the Senate in December, and was strongly supported by the American Bar Association, numerous state bar associations, and the U.S. Chamber of Commerce.

H.R. 4014 clarifies that when financial institutions and other entities supervised by the CFPB submit privileged information, they do not waive attorney-client privilege as to third parties, and the CFPB can share such information with other federal agencies without affecting its privileged status. Although provisions protecting privileged information submitted by banks to other supervisory agencies, such as the FDIC and Federal Reserve Board, have previously existed, the Dodd-Frank Act did not clearly specify whether these provisions would apply to information submitted to the CFPB as well. The passage of H.R. 4014 creates a uniform standard for treatment of privileged information submitted to any federal banking agency.

This development should reassure and encourage banks and consumers to seek legal advice when dealing with the CFPB without the worry that attorney-client privilege will be waived.

Ohio General Assembly Amends Statutory Attorney-Client Privilege

Eric Gallon — Fri, 04 Jan 2013 08:39:48 -0600

Financial institutions' lawyers working in Ohio (and their clients) should take note of an important development regarding the law of attorney-client privilege. On December 20, 2012, Governor John Kasich signed into law Amended Substitute House Bill 461, which makes important changes to Ohio's attorney-client privilege statute, R.C. 2317.02(A)(1).

Until recently, Ohio's attorney-client privilege statute stated that the attorney-client privilege would prevent an attorney from testifying in deposition or at trial except "by express consent of the client or, * * * if the client voluntarily testifies, * * * the attorney may be compelled to testify on the same subject." (Emphasis added.) This language gave rise to two, somewhat controversial principles of Ohio privilege law.

First, the Supreme Court of Ohio has held for over 150 years that the statutory privilege is waived whenever a client "voluntarily testifies" – not just when the client voluntarily testifies about the substance of a privileged attorney-client communication. Although few Ohio lawyers were aware of this line of precedent, it had been followed several times in Ohio's appellate courts and as recently as 2008. Second, the Supreme Court of Ohio has held repeatedly that "R.C. 2317.02(A) provides the exclusive means by which privileged communications directly between an attorney and a client can be waived." Thus, the Court has held that the statutory attorney-client privilege would not be waived "even when the client has told a third person what was discussed." Both of these holdings are contrary to common sense and to Ohio and federal courts' application of the attorney-client privilege at common law.

H.B. 461 overrides this precedent by changing the language of R.C. 2317.02(A)(1). The attorney-client privilege statute no longer states that an attorney may be compelled to testify if his or her client "voluntarily testifies." Instead, the statute now states that an attorney may be compelled to testify if his or her client "voluntarily reveals the substance of attorney-client communications in a nonprivileged context[.]" Hence, divulging a privileged attorney-client communication to a third person will now waive the statutory privilege. With this new language, the Ohio Legislature has brought Ohio's statutory privilege more into line with the common law and resolved two longstanding absurdities in Ohio privilege law.

Ohio property data to remain free online

Polly J. Harris — Thu, 20 Dec 2012 11:28:10 -0600

Put your wallet away and hit print as many times as you like. Because for now, there will be no new charge to download or print property records in Ohio.

As a welcomed early holiday gift, the proposal to charge fees for property records has died in committee. The office of Senate Judiciary Committee chair Senator Mark Wagoner announced last week that the Ohio Recorders' Association proposal to authorize county offices to charge for downloading or printing public records from their government-funded websites will not be part of House Bill 247, which is pending before the Judiciary Committee.

The proposal would have permitted a county to charge up to $2 per page or up to a $500 annual subscription fee. The proposal faced opposition from a number of groups, including attorneys, realtors, title companies and newspapers, that search county recorders' web sites for recorded information, such as deeds and mortgages, that is currently available on line for free.

The proposal was the Ohio Recorders' Association's response to a June 12, 2012 letter from Ohio Attorney General Mike DeWine stating that the practice of some county recorders of creating subscription-only searchable Internet databases for accessing certain public records was not authorized under Ohio law. Attorney General DeWine cited to a 2000 Ohio Attorney General's opinion (No. 2000-046) for the proposition that "a county recorder may not charge and collect a fee for providing Internet access to indexed public records." Attorney General DeWine further recommended that the Ohio Recorders Association request that the General Assembly "amend the relevant statutes to provide this authority."

The Ohio Recorders Association is expected to attempt to re-introduce this proposal next year.

Ohio General Assembly Approves Bank Tax Reform Legislation

Mark Snider — Tue, 18 Dec 2012 10:36:57 -0600

On December 11, 2012, the Ohio General Assembly approved a measure (H.B. 510) that will reform how banks and other financial institutions are taxed by the State of Ohio. Governor John Kasich is expected to sign the bill into law today. If enacted, the changes will take effect for tax years starting in 2014.

This bill expands reforms instituted in 2005 when the State of Ohio overhauled its business tax regime by phasing out the corporation franchise tax and the personal property tax for most corporations and implemented the commercial activity tax in their place. Financial institutional taxation did not substantially change at that time. Until now, financial institutions were subject to one of two alternative taxes, the corporation franchise tax and the intangibles tax. The new law will replace these two taxes with a single financial institutions tax.

The new tax would broaden the tax base by reducing deductions and exemptions, but generally apply lower tax rates. The tax base would be closely tied to equity capital reported for financial regulatory purposes and allocated to Ohio using a single factor based on Ohio gross receipts.

Different tax rates would apply to different tiers of capital. The bill would cause the first $200 million of Ohio capital to be taxed at 0.8%, capital between $200 million and $1.3 billion would be taxed at 0.4%, and capital above $1.3 billion would be taxed at 0.25%. An annual minimum tax of $1,000 would apply.

Dealers in intangibles not subject to the new financial institutions tax would no longer pay the intangibles tax but instead be subject to the commercial activities tax.