Ohio Practical Business Law

Saturday Kid Movies - A Covenant Running With the Land?

Teri Rasmussen — Sun, 07 Mar 2010 21:08:42 -0500

Property law is full of echoes and language of a bygone era. A recent case involving the renovated historic Lincoln Theater in Columbus illuetrates one such concept - what's a covenant "running with the land" and how do you tell that's what it is.

In City of Columbus v. Capital City Urban Redevelopment Corp., 2008-Ohio- 6835 (10th App. Dist.), the Lincoln Theater is now the subject of a legal dispute revolving around Saturday kids' movies for a buck and placement of a plaque. In December, the Couri of Appeals affirmed the trial ourt's determination that these retritive covenants "run with the land" and are binding on the Lincoln Theater's current owner - as well as all subsequent purchasers. The case is currently being appealed to the Ohio Supreme Court as Case No. 10-184.

Capital City Community Urban Redevelopment Corporation (Capital City") bought the Linoln Theater in 1991 to save it from demolition. In 2002, the theater was sold to another nonprofit corporation called Columbus Urban Growth Corporation ("CUG"). The General Warranty Deed transferring ownership contained the following language:

Subject to easements and restrictions of reord, real estate taxes due at the June 2003 collection and thereafter, and provisions of prargraph 9 of the Real Estate Purhase Agreement between the parties whih is incorporated by this reference.

The referenced Real Estate Purchase Agreement paragraph had two restrictions concerning the use of the theater:

(a) The Buyer agrees to provide Saturday movies for children once the theater is operational, and for so long as feasible. The cost is to be $1.00 or less for a double feature.

(b) A bronze plaque is to be permanently installed and maintained on the front of the property. The size, text, and location of plaque on the building may be selected by Charles L. Adrian [affilated with Capital City] and will be architectually onsistent with the Long Street facade of the property.

After CUG sold the theater to the City of Columbus in 2004, problems arose concerning whether the cheap Saturday kids movies and maintenance of a bronze plaque applied to the City of Columbus as the new owner and to any subsequent purchaser. In a way, the whole case seems silly to me. What's the big deal about having a plaque on the front of the building about its histori nature? And Saturday kiddie movies for a buck are required only so long as it is "feasable" - which would certainly be open for interpretation.

The case does, however, do a good job both of stating the rule and showing the difficulty in applying the rule to particular facts. As the Court of Appeals explains:

The determination of whether a ovenant euns with the land depends on whether the covenant is real or personal. A real covenant runs with the land; a personal covenant usually does not run with the land, A real ovenant is related to the realty, having for its object something annexed to, inherent in, or connected with the land. A covenant is determined to run with the land when the liability to perform it or the right to take advantage of it passes to the assignee of the land The common law test of a ovenant running with the land requires that its performance or non-performance must affect the nature, quality, value, or mode of enjoyment of the estate demised yo which it must relate. Conversely, a personal covenant does not run with the land, and is for the personal use and enjoyment of the land solely by the original parties to the ovenant. (itations omitted).

The Court of Appeals further referenced three factors to help in making the determination whether a covenant is one running with the land and thus binding on all subsequent owners of the property:

intent of the parties
whether the covenant "touches and concerns the land" which means "the property was made more useful or valuable by the covenant"
whether privity of contract exists

Prvity and intent were not at issue according to the majority. The rationale of the Court as to why Saturday kid movies "touch and concern" the land and is a covenanr "running with the land" is interesting:

the showing of Saturday movies for children directly relates to the ongoing operation of the theater. The Saturday children's movies are deeply intertwined with how the theater may be used on Saturdays and affects many areas of the business, including maintenance, scheduling, income, purchasing, advertising, and marketing. The property os also made more useful by tremendously increasing the theater's usage by children, as well as their parents, the theater will also increase the goodwill between it abd the nearby neighborhoods, citizens, and rhe surrounding area.

For my money, while the Court got the test right, the case sorta feels like a result in need of a rationale.

"Standing by Your Man" Can Get You in Trouble with the IRS - New Developments in the "Innocent Spouse" Doctrine

Teri Rasmussen — Sun, 28 Feb 2010 12:47:02 -0500

Women, even professional women with careers as lawyers, CPA, bankers, etc., have been encouraged to give their "man" a little deference when it comes to things like our income tax return. And we do, even in circumstances where we might tell a client they should be more alert. But what happens if your spouse (and typically it IS the husband) decides to take a few shortcuts and be a little "aggressive" in his -- and YOUR - tax reporting to Uncle Sam? A recent Sixth Circuit Court of Appeals decision should give us all pause.

WAKE UP!!! Totally apart from any moral or ethical obligations, what you sign off on with respect to your joint tax return CAN come back to haunt you BIG TIME!!! So, calling all spouses, male or female, you really do need to pay attention and understand that tax return.

Recently, in Greer v. Commissioner of Internal Revenue Service, Case No. 09-1420, the United States Sixth Circuit addressed the "innocent spouse" doctrine whereby a spouse can escape liability for the wrongdoing of his or her spouse (traditionally the husband) if they essentially had no knowledge of what that spouse was up to and no reason to be suspicious.

In Greer, the case involved a high school music teacher wife who sought to evade liability for a failure to report tax liability associated with investments made by her husband. The case concerned the Greers 1982 tax return and alleged understatement of income through erroneous deductions- at that time the Greers had been married for 15 years. In part because the tax benefits exceeded the amount invested, the Tax Court had denied "innocent spouse" relief because it believed Mrs. Greer "should have at least made further inquiry." The Sixth Circuit affirmed that decision. The case dealt with erroneous deductions rather than omitted income and left the "knowledge of the transaction" test in place for omitted income cases.

The "innocent spouse" defense is based on section 6015 of the Internal Revenue Code which requires that the spose seeking to avoid liability must establish:

they did not know and had no reason to know that there was an understatement of income.
"taking into account all the facts and circumstances, it is inequitable" to hold that individual liable for the deficiency.

The Sixth Circuit began by determining "what test should be used in determining whether a taxpayer had a reason to know of an understatement, or to suspect a possible understatement, resulting from disallowed deductions or credits." The Court ultimately adopted the "duty of inquiry" test laid out by the Ninth Circuit Court of Appeals in Price v. Comm'r, 897 F.2d 959 (1989) for erroneous deduction cases:

Even if a spouse is not aware of sufficient facts to give her reason to know of the substantial understatement, she nevertheless may know enough facts to put her on notice that such an understatement exists. Such notice is provided if the spouse knows sufficient facts such that a reasonably taxpayer in her position would be led to question the legitimacy of the deduction. In such a scenario, a duty of inquiry arises, which, if not satisfied by the spouse, may result in constructive knowledge of the understatement being imputed to her.

To determine whether a "duty of inquiry' has been triggered with respect to cases involving an erroneous deduction, the Court foud four factors relevant:

Spouse's education
Spouse's involvement in the family's financial affairs
Presence of unusual or lavish expenditures beyond the family's norm
Other spouse's evasiveness or deceitfulness concerning the family's finances

In some respects, this seems like a close case. Indeed, the Sixth Circuit said as much, observing "[w]ere this de novo review, we might view the matter differently." On the one hand, Mrs. Greer, while obviously well-educated, did not possess a financial education and there was no substantial change in the family's lifestyle. However, although the Court also acknowledged that Mrs. Greer in fact had no actual knowledge of the erroneousness of the deductions taken and had no more involvement in the family finances than many spouses afforded the "innocent spouse" defense, it ultimately found that "Mrs. Greer was probably familiar enough with basic budgeting and accounting to understand representations made on a tax return, even if the ultimate legitimacy of sheltering income was beyond her experience. " Seems like this factor could have gone either way. As far as evasiveness of her husband, the Court was unwilling to overturn the Tax Court'ds finding weighing this factor against Mrs. Greer because it thought the presence of the deduction on the return was enough.

The crux of Mrs. Greer's argument was that she left the family's financial matters to her husband. Sound familiar? Here the Court pointed out that several courts have held "being a homemaker cannot alone relieve a spouse of joint and several tax liability on a joint return and... one spouse cannot bury his or her head in the sand or turn a blind eye to the other's accounting."

Takeaways? Leaving the responsibility for filing your taxes to your spouse, while certainly convenient, may have really bad consequences. So either file separately or be prepared to actually go over the return and ask questions before you sign. Just because you didn't know what your spouse was doing does not let you offf the hook.

Ohio Foreclosure How Longs FAQ

Teri Rasmussen — Sun, 14 Feb 2010 22:29:41 -0500

One of the questions I get asked a lot by my bank and creditor clients is "how long?" How long til we can get the property back? And those on the unfortunate receiving end of a foreclosure have the same sort of question - how long til I have to move out? - for different reasons. Of course the answer is that it depends on so many different things and varies considerably from one county to the nextand one case to the next. But that's not really the sort of answer anyone can run a bank on or make personal decisions with. So here are some slightly more specific FAQ

1. How long can I stay in my home if it is in foreclosure?

If your residence is in foreclosure, it still belongs to you until the time it is sold at sheriff's sale and a confirmation entry is entered by the Court. So, in plain language, the house is still yours until it is sold at sheriff's sale. At that time, title to the property passes to the successful purcahser at the Sherriff's sale. However, it will typically be at least a few more weeks (maybe even two or three months) as a practical matter before the confirmation entry is entered by the Court and the successful purchaser at the sheriff's sale receives the deed. Because foreclosures are taking so long, in "real life", we are probably talking a year or more.

Double-edged sword is that you ARE still the owner as far as taking care of property...... Soooo,,. if you were thinking about just walking away from the whole mess because you're so far underwater equity-wise, it may not be quite that simple. For a brief summary of the consequenses ogf this approach, visit Connie Carr's post entitled Mortgage Debt: The Consequences of Walking Away over at the Ohio Real Estate Blog.

2. How long will the foreclosure take?

Talk about impossible questions to answer! I like to start with the absolute MINIMUMS as far as time periods required if everything went exactly perfectly and there were absolutely positively no delays whatsoever. Here's what has to happen to at least get to the point of getting a Decree in Foreclosure.

Defendants must actually be "served" with the foreclosure Complaint, i.e. they must either actually receive a copy of the Complaint or be deemed served through "publication by service" which means that it's been advertised in those tiny print LEGAL NOTICES part of a local newspaper. Figure probably a week or two if no problems arise.
Once "served", under Ohio law, a defendant has twenty-eight (28) days to respond to the Complaint. So, OK, figure another month here.
If the defendant does not respond after being served, the plaintiff lender can seek a "default" judgment. To do this, the plaintiff lender must file a Motion for Default with the Court and wait for the Court to enter the Default Judgment. This is obviously a HUGE wild card. Some judges may enter judgment right away while others may just let things sit on their desk for months. And there's really not all that much the plaintiff lender can do to move things along. Let's just pencil in a couple of months here as being a not unreasonable period of time for this to happen, but with the understanding that this might well be much longer.
If, on the other hand, a defendant does respond by filing an Answer to the foreclosure Complaint or there are other complications, the plaintiff lender will need to file a Motion for Summary Judgment. A Motion for Summary Judgment is similar to a Motion for Default Judgment, but will need to address any arguments brought up by any defendants. In addition, an Affidavit by an officer of the plaintiff lender will probably also be included setting forth the amount owed and explaining other relevant facts. Once the Motion for Summary Judgment is filed, defendants have fourteen (14) days to respond and customarily, the plaintiff lender will have an additional seven (7) days to file a responsive Reply. Here again, it's up to the judge as to when a decree in foreclosure will be entered and there really isn't that much a lender can do to hurry things up. So, OK, figure 2-6 months here (although I will tell you that I currently have at least one case in which the Motion for Summary Judgment has been pending for more than a year)

So, to recap, to get from the point the foreclosure Complaint is filed to actually having a judgment Decree in Foreclosure, it's going to be AT LEAST 3 1/2 months or so, and THAT IS SUPER OPTIMISTIC!!! More likely, you are really looking at six to seven months or more and even that assumes that everything goes perfectly. My anecdotal expereince is whether commercial or residential, a year or more is NOT an unusual amount of time for a foreclosure to take right now just to get to judgment, even if there is no spirited defense.

3. So the case FINALLY has reached that Judgment Decree in Foreclosure stage! NOW how long til it finally gets auctioned at Sheriff's sale?

Short answer: one heckuva lot longer than you might expect. Again, I like to go with what i know to be the MINIMUM periods of time required and work out from there. Here's what has to happen at this point:

First off, under Ohio law, the property MUST be appraised by appraisers working for sheriff's office. This is because, under Ohio law, the opening bid at sheriff's sale for the proerty MUST be at least TWO-THIRDS of this appraised value. How long this takes will depend A LOT on what county the case is in. However, in general, let's figure about a month here.
Once the appraisal is done, the Sheriff's Office must set the date on which the property will be offered for sale. This is where, as a practical matter, things really SLOOOW down. As a practical matter, this is taking MONTHS right now. By way of example, Franklin County currently already has sheriff's sales already scheduled through March. In other words, right now, this step is taking 3 months or more.
Once the sale date is set, it must be advertised for at least three consecutive weeks. If there is a silver lining anywhere, it's here where the advertising can take place during the waiting period between the time the sale is set and when it actually occurs. Also, unlike some surrounding states such as indiana, typically most Ohio counties have sales on a weekly basis.
If the sale is cancelled for any reason,even if it was something like a blizzard, the property must be readvertised. There is no such thing as "postponing" a shriff's sale without the necessity of having to readvertise the property. However, a new appraisal is not required.

So, to recap here, we're probably talking 3-4 months AT BEST!!!!

4. The Sheriff's sale has happened!!!! When do I get $$$? When do I get the property???

OK, here the "good news" is that in Ohio - unlike certain other states -- the "equity of redemption" ends when the hammer falls at sheriff's sale and the Confirmation Entry gets entered by the Court. The exact process will probably vary from one county to the next. (On its website, the Franklin County, Ohio Sheriff's Office has helpfully posted an overall summary of its procedures following sale as well as an even more specific "What You need to Know as a Potential Third-Party Purchaser" For other counties, visit the Buckeye State Sheriffs' Association website.) In general, here's the process:

Once the sheriff's sale is over, the confirmation entry is to be submitted within 30 days after the sale,
Once the Order of Confirmation has been entered, the plaintiff's attorney is to submit the deed to the Sheriff's Office within seven (7) days thereafter
The successful bidder generally has thirty (30) days following entry of the Order of Confirmation to pay the purchase price to the Sheriff's office, although the precise amount of time will be set forth in the Order of Sale.
The Sheriff is supposed to record the deed within fourteen (14) days of payment, but that doesn't always happen. Once the deed is recorded, it will be sent to the successful bidder.
The proceeds will be distributed as described in the order of Confirmation after the purchase price has been paid in.

So you're looking at another two or three months here.

5. Can I get control of the property sooner by getting a receiver appointed and how long will that take?

Yes, maybe. Appointment of receiver generally only makes sense in the context of commercial properties. Most commercial mortgages provide for the appointment of a receiver and especially if there are defaults other than nonpayment, appointment of a receiver should not be especially difficult. It is possible in certain cases to obtain appointment of a receiver on an expedited basis, but the timing and the identity of the individual appointed is still a matter of discretion with the court. Once the receiver is appointed, the receiver can collect the rents, handle maintenance issues, and interface with tenants. However, in non-emergency situations, it is sometimes difficult to obtain a quick hearing date on the Motion to appoint a receiver.

6. What about a "deed in lieu"? Can that speed things up?

Yes, it can. However, a "deed in lieu" in which the borrower conveys the property over to the lender, usually in exchange for a release or limitation of liability, only really works if (A) the borrower wants to to do this; and (B) there are no other liens on the property. If those two criteria are met, a deed in lieu (DIL in the biz) can happen very quickly, perhaps even in a month or less.

7. So the bottom line is.....?

Any way you look at it, foreclosure in Ohio is a long process for either residential or commercial property. Think at least a year before the property is auctioned at Sheriff's sale and another couple of months before it's finalluy done. In a commercial foreclosure, getting a receiver appointed early in the case can make the long wait far more palatable to the foreclosing lender as it gives the lender control over the income being produced by the property.

Conan Versus NBC Fiasco Illustrates Contract Law at Work in "Real Life"

Teri Rasmussen — Mon, 08 Feb 2010 16:56:10 -0500

The recent late night television mess with Jay Leno and Conan O’Brien is a great object lesson as to what contract law really is and does AND what it actually isn’t and doesn’t do. In my last post, I highlighted some of the various legal arguments being made by Conan, NBC, and to a lesser extent Leno. (Visit "Leno gives his side of 'Tonght Show' intrigue" for Leno's take on the events, including his guranteed payments under his contract.) However, now that it’s over, let's look at some important points about contract disputes as they happen in "real life" well illustrated by the series of recent events.

FIRST - Contract disputes frequently come down to the “letter of the contract” versus “spirit of the agreement” sort of dispute the Conan/NBC situation illustrates. NBC’s initial saber rattling focused on the fact that Conan’s contract as host of The Tonight Show apparently did not specify an exact time slot. (This is the nightmare every transactional lawyer dreads – the one thing you didn’t think of turns out to be the really crucial provision that should have been in there.) From NBC’s perspective, this gave them the right to move The Tonight Show back a mere half hour without breaching their obligations under Conan’s contract. Here, the LETTER OF THE CONTRACT.

Conan’s camp for their part pointed out that The Tonight Show has aired at 11:35 P.M. immediately after the local news for 60 years and essentially contended that the time slot was an “implied” term of the contract. Here the SPIRIT OF THE AGREEMENT. And that close cousin to “spirit” of the agreement”, namely, the “GOOD FAITH” requirement imposed in every contractual relationship.

Now, this is good stuff because it pits those careful enough (or perhaps lucky enough) to have said what they meant against those urging what might be considered a “fair” outcome built on what may well have been shared assumptions at the time the contract was made. In a way, both sides are right, but only one’s perspective can be enforced.

Should Conan have specified a time if that mattered so much? Yeah, probably….. but seriously, who would think anyone would even propose moving The Tonight Show to a different slot? Often, how a court decides to resolve this issue will do much to affect its determination of whether any breach of contract in fact occurred, and if so, what sort of damages should be awarded. Which brings us to the second point of understanding>>>>>>

SECOND – Resolving contract disputes OUTSIDE the court room is generally better for everyone. This three-way conflict had the potential to get really ugly really fast. Conan might have gone to Court to require NBC to keep him on at 11:35 PM until there could be a full hearing of how his contract with NBC should be interpreted. If instead Conan chose to walk away, well then there was a noncompete to deal with and the possibility of being held liable for a breach of contract by failing to continue to perform at the later time slot. The details of how Leno agreed to pass the torch to Conan in the first place (i.e. Conan’s contract was expiring and NBC needed a way to keep him at NBC) almost certainly would have been examined in graphic detail unlikely to be flattering to either NBC or Conan. Things could very well have gotten “personal” between Leno and Conan as they were already beginning to do, something which in the end was probably not going to enhance the image of either in the public eye.

In short, long divisive publicity of this dispute was in no one’s interests. NBC decided that Leno was more valuable than Conan to it (or perhaps even more expensive proposition to jettison) and agreed to pay Conan and his crew enough to make the case go away. And Conan got a nice severance package for himself and his staffers and, perhaps more importantly, the ability to host another show as early as September without having to deal with lawyers and lawsuits. NBC was able to make amends to its affiliates whose unhappiness started the avalanche in the first place. And Leno got back what he apparently never wanted to give up in the first place.

It's relatively unlikely that these three parties would all have wound up where a relatively brief period of intense negotiating got them. And it would certainly have cost all of them A LOT more had this gone the litigation route. Sometimes, it really isn't possible to resolve things among the parties themselves. However,as a practical matter, it is almost always better for the parties themselves - who know and understand the situation better than any outsider could- to find their own resolution.

THIRD - Leverage always matters. In this case, it was the network affiliates -who were contractually obligated to run Jay Leno's 10 PM show - who really got the ball rolling. And ultimately got exactly what they wanted... They were losing money and they were not happy. So even though - contractually - they didn't have a leg to stand on, none of the rest of this sordid affair would have tumbled out, but for NBC's desire to placate this important customer. Then there's Jay who was rumored to have an ironclad contract guaranteeing a hefty payment whether his show aired or not, thus perhaps presenting the economic decision for NBC that it would cost less to keep Jay than to get rid of Conan. And Conan - well he had the ability to make the whole situation a truly horrendous mess both legally and perhaps more importantly from a PR standpoint, thus giving the impetus to NBC to pay him some money instead of insisting that he continue to perform.

In many contract disputes, there may be a well-written contract on which one party can rely from a legal perspective to enforce their position. But that doesn't always mean that's the smart thing to do - never mind about what the "right' thing to do would be. The point is: the law can preserve your options, but the decision must still be made in the context of the surrounding business world.

So, does all this mean lawyers and their contracts are an unnecessary evil to be dispensed with? No - a well written contract helps set the parameters for what is open for discussion and can in some cases influence the amount of leverage one has or doesn't have. it's simply important to understand that neither they, nor their breach, exist in a vacuum.

Jay & Conan - Best Legal Analysis Roundup

Teri Rasmussen — Sun, 24 Jan 2010 18:30:15 -0500

Although the whole Leno-Conan-NBC mess appears to have now been settled by the parties, it's well worth looking more closely at the contractual issues involved which influenced the terms of that settlement. For a great overview of the legal issues involved, visit Conan the Contractarian at the ContractsProf Blog. And of course, some legal issues remain unanswered. I'd like to start by recognizing what seemed to me to be the most cogent legal analysis of the situation. Then in the Part 2 which will be my next post, I have some of my own observations about what is truly an excellent example of what contract law really is and how it actually works in "real life".

Which is probably why I want to start with a practical "Everyman" take on what the restr of us can take from the entire fiasco, then move on to a more academic and scholarly analysis, followed by a pragmatic application of those foundational principles, and finished with a chaser of a business oriented "brass knuckles" approach to determining who had the "leverage" to make the rules of contract law really work for them. So here goes..........

The Leno Deal,,, Be Careful What You Wish For >>>> David Willis of the Texas Small Business Law blog takes a stab at some important lessons the rest of us can take from the gigantic contract mess now facing NBC. His important points:

The terms of the contracts with the hosts do not meet the terms of the contracts with the affiliates. A company's contracts can be interdependent. Change the terms of one and it can also affect what happens in other contractual relationships. In simple terms, NBC didn't really think about the influence of the affiliates when it moved Jay and is now paying the price.
Firing an employee with a contract can be expensive. "The lesson for business owners is be careful of what you contract for because contracts are binding obligations and they can limit the decisions you can make."
Take advantage of the opportunity to maximize or limit your damages.

Contract Law Issues in the Conan-NBC Affair and Conan NBC Contract Issues II >>>> Lawrence Cunningham of Concurring Opinions provides an excellent detailed and quite scholarly analysis of the many contractual issues raised by the NBC-Conan-Jay circus. His overall assessment of the situation describes the situation found in most breach of contract circumstances:

Ongoing discussions between NBC and Conan illustrates the notion of bargaining in the shadow of the law, working out arrangements in light of known or probable legal claims and cosequences. Non-legal forces of course are at work. Conan's legal position, still incrementaly weaker to me.... may play a role in his decision to communicate directly to the public. But his public relations gambit may also be deftly designed for other reasons [such as disaffecting viewers from NBC by paiting himself as the "guy in the white hat".]

In NBC Did Breach Conan's Contract - Here's Why, Rachael Sklar focuses more informally on the various legal arguments as to whether Conan was contractually entitled to have his show start at 11:35 PM, concluding that he was. Her analysis brings in many of the most treasured contract principles such as reliance and "spirit of the agreement" and is quite interesting in its description of various "facts" supporting her conclusion. However you think things should have turned out, this account is well worth reading.

In Conan/Leno Madness: Parsing the Legal Ramifications, Conan/Leno Madness: The Legal Case for Conan, and Conan/Leno Madness: The Legal Case for NBC, the THR, Esq blog (aka The Hollywood Reporter) examines the strength of NBC's argument that because Conan's contract didn't specify a time slot, moving Conan to 12:05 would not be a breach of his contract. Fascinating stuff. Interesting "brass knuckle" approach to determining who has the leverage to make contract law principles work for them.

Yes, You Really Do Have to Follow the Notice and Cure Provisions in the Promissory Note

Teri Rasmussen — Wed, 16 Dec 2009 07:28:30 -0500

And now, a cautionary tale about the importance of actually paying attention to what a promissory note and mortgage say. In the recent case of National City Mortgage Co., v, Richards. 182 Ohio App.3d 534, 2009-Ohio-2556 (10th App. Dist.), the Bank found out that failing to comply with the relatively simple provisions in a note and mortgage concerning notice to be given a delinquent borrower was a costly mistake.

REALLY COSTLY >>>>>> as in DISMISSAL of a FORECLOSURE

FACTS. The facts here are numbingly similar to those in any number of other cases. Ms. Richards, the borrower had a loan from the Bank secured by a mortgage on her property in Columbus - presumably her residence, although the decision doesn't really say. Anyway, when Richards defaulted, the Bank apparently sent her a notice of default by certified mail only; no notice was sent by regular mail. The certified mail receipt came back "unclaimed".

In December 2005, the Bank initiated a foreclosure action. Richards, acting pro se, filed an answer in January 2006 indicating that she had made a payment of $3,329,70 consisting of the January payment, the past-due amount and other fees totaling, all as indicated by her December 2005 statement, and therefore was not in default. The Bank responded by sending Richards a letter stating that, not counting the payments already made by Richards it would take payment of $6,838.09 -which included payment of attorneys' fees - to reinstate her loan.

Richards filed a second response to the foreclosure Complaint indicating she had sent additional funds exclusive of the attorney fees to the Bank to bring her account current and had sought a payment plan for the attorney fees. The Bank then returned all of the payments sent by Richards since the commencement of the foreclosure.and sought summary judgment on its foreclosure complaint. Several months later, while the case was still pending, the Bank [for some inexplicable reason as far as I can see] sent a "demand/acceleration letter" to the property address; the case doesn't say whether the letter was sent by regular or certified mail and it doesn't appear to have figured in the decision.

Richards alleged among other arguments that the Bank had failed to provide proper notice of default and opportunity for cure, thereby failing to satisfy a condition precedent to acceleration of the note and foreclosure of the mortgage securing the note. The trial court eventually granted summary judgment in favor of the Bank. The Court of Appeals REVERSED....

>>>>>> Here's where everyone needs to pay attention! >>>>>>

THE NOTICE PROVISIONS. The promissory note had a relatively ordinary notice of default provision providing for a thirty day cure period:

If I am in default, the Note Holder may send me a written notice telling me that if I do not pay the overdue amount by a certain date, the Note Holder may require me to pay immediately the full amount of Principal which has not been paid and all the interest that i owe on that amount. That date must be at least 30 days after the date on which the notice is mailed to me or delivered by other means,

In addition, both the promissory note and mortgage had explicit provisions requiring notice to be given by first class mail. The note said:

[A]ny notice that must be given to me under this Note will be given by delivering it or mailing it by first class mail to me at the Property Address above or at a different address if i give the Note Holder a notice of my different address.

Similarly, the mortgage provided:

All notices given by Borrower or Lender in connection with this Security Instrument must be in writing. Any notice to Borrower in connection with this Security Instrument shall be deemed to have been given to Borrower when mailed by first class mail or when actually delivered to Borrower's notice address if sent by other means.

LESSON TO BE LEARNED >>>> Most lenders have realized by now that in the current economic environment, courts are not exactly tending to be sympathetic to lenders failing to cross all their "t"s and dot ail their "i"s. This is yet another reminder that ESPECIALLY where it is easy to comply, it is most certainly in the lender's best interests to do so .... to the letter.

It is easy enough to send a demand letter by both regular mail and certified mail; even if the certified mail comes back "unclaimed", the lender will get the benefit of the "mailbox' rule that the regular mail got through. Fed. Natl. Mtge. Assn. v. Doyle, (Oct. 9, 1998), 6th Dist. No. L-98-1010, 1998 WL 700663.

And if your documents say first class mail, then make sure it at least gets done that way. By the same token, if your documents provide for a cure period, make sure your demand letter incorporates the time period provided.

IN SHORT, READ YOUR LOAN DOCUMENTS BEFORE YOU START THE FORECLOSURE AND DO WHAT THEY SAY.

For those particularly "in" to this issue, the decision also provides several helpful drafting pointers about ways the Bank's attorneys could have put together a tighter better drafted Complaint that might have helped their cause somewhat with respect to certain procedural issues.

Franklin County Court Pleadings Go On-Line!

Teri Rasmussen — Sun, 13 Dec 2009 18:33:36 -0500

Franklin County Common Pleas Court has finally joined the courts of other large Ohio counties, and more than a few smaller counties (including Delaware County), by making pleadings FILED on or after December 1, 2006 available on-line in PDF form. The key here is FILED,

In new cases filed on or after December 1, 2009, ALL pleadings will be available on-line. Incases already pending on December 1, 2009, pleadings already filed will not be available on-line, although dockets showing their filing will continue to be available just as they have been, However, NEW pleadings filed in these older case WILL BE available on-line as they are filed,

Pleadings filed in Tenth Appellate District/Franklin County Court of Appeals on or after December 1, 2009 will aso be available on-line according to news reports in Business First. Judges of the juvenile, domestic, and probate divisions of Franklin County Common Pleas Court have elected not to make records in those cases available on-line - probably a good thing given the nature of those sorts of cases. There are also plans to go back and add pleadings already filed to those on-line.

No additional software or passwords are necessary. Nor is there any additional charge to view pleadings. Once on the Franklin County Common Pleas Clerk of Court's website, cases may be searched just as they have been. When the desired case is located and the docket sheet displayed, a PDF icon will appear to the right of those pleadings available on-line. Click the icon to view the pleading which can then be downloaded and/or printed,

Cuyahoga County (Cleveland), Hamilton County (Cincinnati), and Montgomery County (Dayton) have already had pleadings available on-line for quite a while. In fact, Montgomery County intends to begin requiring electronic filing of pleadings in 2010; this may be available in Franklin County sometime in 2011.

It's amazing how happy small things ike this can make me.

Making "Accord and Satisfaction" Work for You

Teri Rasmussen — Thu, 10 Dec 2009 22:27:38 -0500

Ever think there's got to be a better way than wasting time wrangling with another party with which you're doing business when there's a dispute over the amount really owed? I’ve warned before about the risks of accepting checks intended as FINAL payment on a disputed obligation on my Fun with “Payment in Full” Checks post. Now a couple of Ohio appellate decisions illustrate the “right” and “wrong” way to go about using a “payment in full” check to resolve a dispute and/or bring finality to the transaction.

Two situationa in particular are addressed:

When a landlord makes deductions from a security deposit, sending the balance to the former tenant, it assumes the relationship is now over. So what happens if the former tenant cashes the check sent by the landlord, but then sues the landlord for the balance of its security deposit?
A customer complains to its vendor/supplier about the quality of the goods shipped to it and believes it is entitled to some sort of discount as a result. If the vendor/supplier does not agree, what can a customer do?

Whichever side of the table you’re on, it’s important to understand the practical side of the legal concept of “accord and satisfaction” and how it can affect the ability of the tenant to get the rest of the security deposit back or of the supplier to receive full payment after cashing a partial payment check from the customer.

Tourville v.Terzuoli, 2009–Ohio-2743 (Montgomery Cty) illustrates an ineffective use of "accord and satisfaction". After the tenant moved out, the landlord sent the tenant a check for a refund of a portion of the security deposit originally made by the tenant, together with an itemization of the deductions made from the security deposit. The tenant immediately called the landlord to discuss the itemized deductions and then cashed the check. A few weeks later, the tenant sued the landlord for a refund of the remainder of the security deposit withheld.

The trial court held that the tenant was barred from recovering the rest of the security deposit by the doctrine of “accord and satisfaction” because they cashed the check for a lesser amount. The Court of Appeals reversed and said the tenant should have been allowed to present evidence showing it was entitled to the balance of the security deposit.

The Court explained the “accord and satisfaction” concept this way:

First the defendant must show that the parties went through a process of offer and acceptance – an accord. Second. the accord must have been carried out – a satisfaction. Third, if there was an accord and satisfaction, it must have been supported by consideration.

The Court further explained that when a check cashing is involved, there must have been reasonable advance notice that the check was intended to be in full satisfaction of the outstanding debt. Because “there was no evidence that the check was the product of a negotiation between [the landlord and the tenant] regarding the amount of the security deposit that should be refunded,” the Court held no accord and satisfaction occurred. In other words, merely cashing a check for a lesser amount did not preclude the tenant from getting the full security deposit back.

By contrast, the case of Barmar Enterprises, L.L.C. v. Benco Industries, Inc., 2009–Ohio-366 (8^th App. Dist. Cuyahoga Cty) is an example of an effective use of the accord and satisfaction doctrine to prevent recovery of the larger amount. Here, a steel brokerage delivered product to a distributor. Because the distributor’s end users rejected shipments on the basis of poor quality, the distributor issued itself six debit memos against the steel brokerage’s invoices. The distributor eventually sent the steel brokerage a reconciliation showing the debit memos accompanied with the following statement:

Enclosed please find our reconciliation of your account. In a show of good faith we have drafted a check in the amount of $30,892.96 representing full and final payment to [the steel brokerage of invoices totaling more than $100,000] thus clearing our account to a zero (0) balance. Upon your acceptance, [the distributor] will release your 44,860 lbs of steel [product in the possession of the distributor]. *** Please sign and fax back your acceptance of this accord and satisfaction in order to conclude this matter immediately.

The steel brokerage signed the document, the distributor sent the steel brokerage the specified check, and the check was cashed. Later the steel brokerage sued the distributor for the difference, alleging it sustained damages when it resold the rejected steel to a third party at a reduced cost. The Court said no dice and barred the steel brokerage from any recovery.

What these two cases illustrate is that putting a little thought into handling a dispute over an obligation can pay off – literally. Had the landlord accompanied the check for a partial refund of the security deposit with a statement indicating that it was intended as full and final payment of all amounts due from the landlord, it might have gotten the same result as the distributor did, i.e. by cashing the check when it had notice that it was intended to resolve the entire issue of the amount of the refund, the tenant would be barred from any further recovery of the amount withheld.

Be Thankful for the Prevalence of Technology in Ohio Courts

Teri Rasmussen — Fri, 27 Nov 2009 20:23:17 -0500

It's always the little things you tend to take for granted that you really should be the most thankful for having. Until recently, I had NO IDEA of how thankful I should be for the way Ohio courts have embraced and incorporated technology. In the last few weeks, however, I have had substantial exposure to the way things work court technologywise in... well let's just say, an adjacent State. I felt like I'd travelled back in time ten years or more and could hardly believe how inefficient it all seemed.

Among the modern technology I sorta thought EVERYBODY had was internet access to case docket sheets showing pleadings filed in particular cases. In fact, I sometimes groused because my local trial court's Clerk of Courts website -- unlike those in Cleveland and other areas of the state -- would ONLY allow me to see the name of the pleading and the date filed and might be a few days behind to boot. All federal courts (with a password) and many trial and appellate courts in Ohio also allow you to download from their Clerk of Court websites - immediately and for free (or at least at nominal cost) -- copies of the actual pleadings filed. And, in some Ohio courts I can even electronically file pleadings right from my computer.

Well, no, apparently that's not so normal in at least some other States. In this particular State bordering Ohio, some of the trial courts don't even have a website at all and one heckuva lot have NO internet access to docket sheets. Is this a big deal? Well it is if you're used to being able to answer your own questions quickly about service and what's been happening in a case with which you're not familiar, but now need to jump in as a pinch hitter.

Suddenly, I'm back to the time where I'd have to write a note to my secretary giving her the case number and party info, getting her to call the court and perhaps beg for information and/or documents BEFORE we sent them a search or copy fee, and if not successful, waiting hours, days, or weeks for information I need as a lawyer before I can decide what should be done next. And of course, if it's a few days or weeks later that the information finally comes in, now I have to refresh my memory about what the issue in the case was that made me ask for the information in the first place. Obviously, the additional time and effort now saved with implementation of modern technology is substantial. And it's only when that sort of access isn't available instantly that you truly appreciate the impact of technology on your practice of law.

Ohio has benefited from a substantial emphasis on the importance of courts implementing technology. When the Ohio Supreme Court first began surveying courts in 1989 about whether any technology was available and being used, less than two thirds of the courts even bothered to respond to the survey. In 1993, Chief Justice Thomas J. Moyer created a program of direct technical assistance to trial and appellate courts in Ohio to support various initiatives and implementation programs.

As the bi-annual survey of technology use in Ohio courts continued, there has been a 100% participation response rate since 1996. Since 2002, all Ohio Clerks of Court have automated records and approximately 85% (and I would add from personal experence all major population centers) have websites of their own allowing some sort of access to case dockets.

For more detailed information on the progress and scope of the implmentation and integration of technology in Ohio courts, take a look at some of the bi-annual surveys:

There's also this interesting 2003 speech by the Chief Justice.

Technology has interjected itself slowly into the way I practice law and I haven't always initially been happy about changes it brought (I was orginally very NOT excited about electronic case filing aka ECF when that first came out - don't know how I managed without it now). But it seems to have worked out well in the end an I'm not going back.

Now I realize this isn't like world peace or anything, but in my day to day work life it matters. Personally, I have now sworn to never ever complain about my access to Ohio court records again.

Are We There Yet? - Closing Lists Show the Progress

Teri Rasmussen — Mon, 23 Nov 2009 10:39:45 -0500

Are we there yet? Anyone who has ever been involved in a transactional deal of any complexity has udoubtedly at least thought, if not uttered, this well worn phrase in frustration as yet another obstacle arises to the successful completion of the contemplated transaction.

Even sophisticated clients are sometimes frustrated by how long it seems to take lawyers to "close" and complete a transaction. Clients with less experience can become positively apoletic about the fact that it takes more than a week or so for the lawyers to declare the deal done and finished. Frankly, as one of the lawyers at the center of these trabsactions, I too am occasionally surprised how long it can take in certain situations to successfully complete the transactions.

So why does it take so long, and perhaps more importantly, how can everyone in the deal know how close we are to being able to answer yes to the perennial question "are we there yet? One of the best tools to understand both what's involved in getting a particular transaction completed AND, on a real time basis what's left to do is a CLOSING LIST. Every transactional attorney uses some variation of a Closing List to keep track of which tasks and items have been completed, which are still in process, and which issues and tasks still need to be addressed.

A Closing List for a loan transaction (Click here and here and here for examples) necessarily differs somewhat from a Closing list for a purchase/sale of a business or other transaction (click here and here for examples), both share the same basic elements and utility. When I do my Closing List, I always start by putting the contact information for all the parties and their attorneys and other important agents and representatives at the top of the first page. This way I'm never searching for a phone number or e-mail at a crucial point in negotiations.

The rest of the Closing List is generally in the format of a table. My tables have visible grid lines so I can easily see each discrete item or task. I usually have five columns:

Item Number (for quick reference and efficient organization of various folders pertaining to the deal)

Name of Item or Task (for obvious reasons)

Responsibility (i.e. which party is primarily responsible for preparing the documentation or completing the task)

Status (entries in this column are constantly changing as progress occurs)

Comment (for additional useful information such as actual or potential obstacles to be resolved, other contact people, etc,)

Because every deal is different, most closing lists are organic instruments which begin with certain basic items and tasks common to that sort of particular transaction and then initally grow longer as the unique aspects of the deal at hand become fleshed out. Like other transactional attorneys, building out the Closing List helps me organize what needs to be done and the order in which tasks and items should be attacked.

I usually wait to give clients a copy of the Closing List until I am fairly certain it is a reasonably complete reflection of what will be entailed to make the contemplated transaction a reality in a manner that properly protects my client. After circulating the intial Closing List, I try to provide updated revised Closing Lists on a regular basis which show where progress has been made and where we may have run into a roadblock or detour that may delay completion of the transaction.

My hope and intention is that sharing these updated Closing Lists will allow clients to have as close to the same understanding as I do about "where we are" as far as getting the deal done and why we're not there yet. Thus, if your attorney gives you something of this nature, don't just put it aside and assume it has no purpose relevant to you. It's your best guide to what's been done so far to bring the deal to fruition and what still remians to make it a reality.

Raising Capital for the Ordinary Lifestyle Business

Teri Rasmussen — Fri, 13 Nov 2009 15:25:14 -0500

Tech is HOT.... and chances are, if you have a technology-based or tech-related business, you've already at least heard about the enchanting world of venture and angel capitaltists as a source of funds for your business. Or perhaps you've even explored the possbility of various "grants" from government or private associations. But what if you're a successful, but perhaps more ordinary, outfit needing additional capital to operate or to expand and prosper? Where do you go in a time when credit is tight even for the most profitable of businesses and banks just aren't that eager to take many risks?

Lately I have been having writer's block with this blog - something which hasn't happened much since I started writing it a couple of years ago. So it was especially welcome when a business owner at the Chamber of Commerce forum I recently attended asked precisely this question and helped me break through and focus again on issues of concern to businesses and their owners that I can help answer.

Venture capitalists and so-called angel investors are enthralled with new technology embedded in what is sometimes called a "growth" business or, in the parlance of one speaker at the forum, a "sudden wealth vehicle". So what if you have what is often known as a "lifestyle" service or manufacturing business focused on the proverbial tortoiselike more steady, but perhaps less astonishing, growth? It doesn't exactly take rocket science to figure out that the iconic "friends and family" route may be the most viable alternative available to you.

Every one of us probably has a number of relatives or close friends who love us and only want us to be happy. These are the people - the "friends and family" ("F&F") - we go to when our business really needs $$. I've posted before about some of the risks of gving even a sliver of ownership to someone else. However, If the company needs a cash infusion either to continue operating or to grow and traditional financing is not available, this may be the only practical alternative,

Friends and family may often be willing to provide funds without any formal documentation or "due diligence". But suppose both you and your benefactor would like to make the relationship a bit more businesslike. What then? There are several alternatives - here are a few ideas:

1. Promissory Note. The easiest way to make a more formal record of money received from F&F is to use a promissory note. It can have a specific payment schedule, be due after a period of time (say a year or two) or be a DEMAND note which allows the person lending the money to decide when they want to be paid back. For tax purposes, it is important to have at least a minimum rate of interest if the money is from a relative.

2. Stock with Call Option. It is also possible to give F&F some "temporary" .ownership of the business until you pay back the money given to you. If stock (or other ownership interest like an LLC Membership Interest) is given with a "call" option, it essentially sets a repurchase price that will need to be paid to regain complete ownership. With a "call" option, the company gets to decide whether and when it has the ability to "buy out" these ownership interests.

3. Stock with Put Option. Stock with a "put" option is similar to a "call" option except that it is the person holding the stock who gets to decide within certain specified parameters whether and when they want to be "bought out".

4. Nonvoting Stock. If your business is a C-corporation or a LLC, you could also give F&F nonvoting stock or membership interests. With this alternative, F&F can get the economic benefits of ownership, but do not have the ability to control the business and financial affairs of the company. Because S-corporations can only have one class of stock, this option is not available to businesses that have selected this choice of entity. A similar result can be obtained, regardless of the choice of business entity, with respect to larger groups such as employees through use of a "phantom" or "mirror" stock plan. Thia basically gives recipients a sort of "virtual" ownership interest which can be tied to performance in their work for the company. Use of a "voting trust" in which the voting rights connected with shares of stock are assigned to another party is yet another variation leading to a similar result.

5. Convertible Debenture. These instruments are a sort of hybrid between a promissory note and ownership interests. Those providing funds are given a promissory note for the amount of the money given. Unlike an ordinary promissory note, under certain conditions, holders of the note can elect to "convert" their loan to an ownership interest in the company.

These are just a few of the options available to any business seeking private financing. A good business attorney can help determine which alternative best fits any particular company based on the founder's goals, the company's immediate objectives, and the situation faced by the business.

A Brief Interlude of Amusement

Teri Rasmussen — Mon, 02 Nov 2009 19:07:39 -0500

Mostly because I feel like it and this is MY blog, today's post has nothing more than a selection of links to stuff I found today (after working hours, of course) that sorta cheered me up and which I thought might amuse others as well.

Lately I've been a bit grumpy and a tad more depressed than usual, perhaps in part due to my capitulation to the realization that we really are entering the long Winter months I despise so much. And work has recently been both busier/wearing and less intrinsically fascinating - a decidedly bad combination - so it's time for some attitude adjustment. Come along for the ride!

Washtenaw Jail Diary (Ann Arbor Chronicle) - what is it about being in jail which really brings out the brilliant writer in those who have such a gift? This is an ongoing installment series about a Twitter feed of recollections by an individual jailed in the Wastenaw County Jail in Ann Arbor, MI that began in April 2009. Well written. And if you're feeling down. this will certainly make you feel infinitely better about your particular situation or circumstances while still bringing a smile to your face. Hat tip to Above the Law
A Real-Life Big Brother Poster (Business Pundit) - as in George Orwell's 1984, not the CBS TV reality Series - supposedly appearing outside a London Tube station. I just thought this was interesting.
New language for those Mutual Releases exchanged in settlements so clients will be protected if interplanetary travel ever takes off commercially - Read about it at Legal Blog Watch's Contracts: Throughout the Universe, From the Beginning of Time post or in the original WSJ post "Lawyerese Goes Galactic as Contracts try to Master the Universe" leave it to lawyers to add yet another phrase to several others that already cover whatever's remotely likely to happen. Still I like seeing that creativity is still out there among the lawyer class and i suppose folks also laughed about reserving rights beyond the shores of Europe at one time.
Nagging by one's spouse bad enough to want to go back to jail or get a divorce? Apparently in some cases, YES,according to this story in The Times On-Line (that's the London U.K. one)

Empirical Investigation of Corporate Veil Piercing Cases

Teri Rasmussen — Wed, 28 Oct 2009 22:32:25 -0500

Is the law and determinations in individual cases of corporate veil piercing an “unprincipled hodgepodge of seemingly ad hoc and unpredictable results”? Often it may seem so. Now, however, Political Science professor Christina Boyd and Law professor David Hoffman have teamed up to take a look at actual cases to learn how these sort of cases actually work in practice. As someone who has always thought that theory and practice are equally important in understanding and applying legal concepts, I was thrilled and excited to come across this study which will be forthcoming in Northwestern Law Review in an article entitled Disputing Limited Liability.

The study involves investigation of six years of data of federal district court cases from 2000 to 2005 involving corporate veil piercing litigation. It looks to actual results in these cases as measured by outcomes in motion practice during discovery, at summary judgment, during trial, and in post-trial practice to arrive at “a set of observations which speak to the life of veil piercing law, rather than the gauzy rationalizations presented by judges’ written responses.” Boyd and Hoffman conclude

Plaintiffs do win far more often during litigation than popular accounts of the doctrine’s rare nature would have us expect, but their ultimate chance of obtaining relief on the merits is obscured by settlement. which disposes two of three veil piercing cases filed in federal court…. To owners of the smallest of businesses, the message coming from this data is unfortunately both clear and unsatisfying: neither reliance on legal formalities not pat expectations about the pro-business orientation of conservative judges will protect your firm from the need to dispute its veil in court.

The abstract summarizes their discoveries:

Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing than corporations; undercapitalization is strongly associated with success while conclusory grounds like “facade” and “sham” are not; and defendants’ legal speculation is predictive of plaintiff failure. Extra-legal factors play a more striking and counterintuitive role. Plaintiffs suing companies with few employees are much more likely to win veil piercing motions, and obtain relief in cases, than companies employing many workers.

Hoffman has also summarized key findings of the study in a series of blog posts on Concurring Opinions:

Among other interesting findings, Hoffman points out that while 78% of the cases “resulted in plaintiffs realizing some value from their veil piercing claims”, often through settlement, judicial determinations of veil piercing happened in only about 6% of the cases.

Now, from down here in the trenches, the findings and conclusions of this study mostly seem to match what I would have expected based on the case law and lawsuits I’ve seen in my own law practice. In particular, the study supports my viewpoint that one of the reasons LLCs are better for closely held businesses is that it’s just harder to get in trouble than with corporations which require more record-keeping. It also doesn’t surprise me much that if you can show undercapitalization, you’re likely to have a winner from a plaintiff’s standpoint. Still it’s always interesting to see how these issues play out in general.

Credit Bidding in Foreclosure Cases in Ohio: SURPRISE - Maybe Not!!

Teri Rasmussen — Fri, 23 Oct 2009 07:15:22 -0500

Suppose a foreclosing lender had to come up with the CASH for EVERY deposit required in foreclosure sales in which it was the foreclosing plaintiff and successful bidder at sheriff's sale. It shouldn’t take long to realize that we are talking about a MESS OF DOLLARS here. Could that cause a cash flow issue and maybe slow down the pace of foreclosures? Well maybe.

About a year ago, Ohio made several significant changes to its foreclosure law. Then and probably even more now, foreclosures (particularly of the residential variety) were widely being perceived as increasingly serious epidemic. And so various foreclosure mediation programs were born, backlogs legitimately produced delays, and courts in some areas of the state started instituting procedures such as referring every single foreclosure case to a magistrate which promised to slow the entire process down considerably.

Now from a lender standpoint, none of this was good news. But apparently, in the view of some, this wasn’t enough. And so, in some courts now – primarily in northeast Ohio which has been hit hardest, additional measures have been taken to make foreclosure a more difficult process for lenders.

I mentioned the other day that I’d made a trip down to a Franklin County, Ohio sheriff’s sale in a pending foreclosure case I am handling for a client. And part of the reason I went myself was that it involved bidding for a junior lienholder in a situation in which we were anticipating contested bidding. Which squarely raised the question: could I credit bid on behalf of this junior lienholder or was my client going to have to come up with the full amount of the deposit typically paid by third party purchasers?

Now, you think you know things… and then you find out that well, maybe, you don’t or at least the whole world isn’t the way you thought – and if you’re anything like me, that starts to concern you at least a wee little bit ‘cuz now you start to worry ‘bout what you CAN rely upon. And what I learned this week was that while fortunately here in Franklin County, the world of foreclosures and sheriff’s sales was indeed precisely as I thought, it’s a “whole ‘nother ball game” elsewhere in Ohio.

Specifically what I found out was that the concept of “credit bidding” whereby a lienholder did not have to come out of pocket so long as the amount of its bid was no more than the amount owed it was not quite so universal a truth as I had heretofore believed. Here in Franklin County and Central Ohio, sanity – from the lender perspective – reigns. First lienholders needing or wishing to bid in a property brought to sheriff’s sale in a foreclosure proceeding need only bring a much smaller specified amount to successfully “bid in” property. In addition, junior lienholder (such as my client) are also not required to pay more than this.

In Cuyahoga County (i.e. Cleveland), it’s a whole different story. There, NO ONE is allowed to credit bid AT ALL. Local Rule 27 governing foreclosure sales requires a 10% deposit (based on the appraised value of the property being offered) to be made by the successful bidder at sheriff’s sale. It also states:

When the purchaser is the lien holder after the lien of costs, taxes and assessments, the Court may order, if the lien holder or assignee is the successful bidder at sale, that the required deposit be waived and thar all costs, taxes and assessmenof ts be paid upon receipt of a statement from the Sheriff of Cuyahoga County

However, the Foreclosure Terms of Sales available on the Cuyahoga County Sheriff’s website make it absolutely clear that NO WAIVERS willl be granted, stating "There shall be no waiver of Deposit for any Sheriff Sale.".

A similar procedure has also been adopted in Erie County. In Lucas County (i.e. Toledo), however, lienholders are only reqired to come up with $1000 plus the amount of real estate taxes due. And in Montgomery County, Local Rule 2.23 permits credit bidding for first lienholders, but not for jumior lienholders, So I suppose the practice point here is to be sure to check the local rules before showing up at a sheriff's sale.

Why is this happening? it arises from the interpretation of revised Ohio Rev. Code 2327.02 which provides in reelvant part:

If the property is sold under an order of sale or transferred under an order to transfer, the officer who conducted the sale or made the transfer of the property shall collect the recording fee and any associated costs to cover the recording from the purchaser or transferee at the time of the sale or transfer and, following confirmation of the sale or transfer and the payment of the balance due on the purchase price of the property, shall execute and record the deed conveying title to the property to the purchaser or transferee. For purposes of recording that deed, by placement of a bid or making a statement of interest by any party ultimately awarded the property, the purchaser or transferee thereby appoints the officer who makes the sale or is charged with executing and delivering the deed as agent for that purchaser or transferee for the sole purpose of accepting delivery of the deed

Not certain the statute actually forbids credit bidding? Well, neither am I. Now, rationally and logically, here is what I can see. If counties want a deposit to be made to cover real estate taxes, well O.K. maybe I can see that. However, beyond that, when it comes to the first lienholder, it doesn't even make sense to require additional payments into the Court, It doesn’t make sense because the lienholder is PAYING ITSELF at this point!!

For junior lienholders, I suppose I can see some logic here, but as a practical matter , it still makes very little sense. Junior lienholders in one case are likely to be seniore lienholders in another case so it is unlikely that there will be any actual problem with payment of these amounts at the time the deed is ready. And not infrequently, given the delays experienced in completing the foreclosure process, the successful lender bidder will have already assigned its bid and sold the property to a third party in any event , thus complicating the financial accoounting for these transactions.

SCOTUS Across the Pond: Introducing SCOTUK of the United Kingdom

Teri Rasmussen — Tue, 20 Oct 2009 06:13:00 -0500

Until he retired a few years ago from Iowa State University, my Dad Jorgen Rasmussen taught Political Science, specializing in British and European politics. So, carrying on his Anglophile tendencies, the advent of the Supreme Court of the United Kingdom seems rather too important to ignore, notwithstanding the relative lack of notice it seems to have attracted here in the States.

Officially, as described in this Official Press Release 01/09, the new court came into existence on October 1, 2009 and has apparently been six years in the making. It replaces the Appellate Committee of the House of Lords which seems to be more commonly known as the Law Lords. Although the new Supreme Court had already heard arguments, Queen Elizabeth II (or as the Court’s second press release refers to her, “Her Majesty The Queen”) made it official last Friday (October 16) in formal opening festivities. Here’s some video of the festivities.

The change is intended to provide greater independence to the judiciary which has previously been much more intertwined with the legislative branch than is the case in the United States. Physically, the new court will be moving out of the House of Lords and into its own quarters. In some respects this seems an unimportant, almost trivial, change. Yet it also seems like looking back years from now, the move could be huge in charting a perhaps more independent (from the legislative branch) course the UK Supreme Court takes. In another break from the past, the new “Justices” will no longer be members of the House of Lords while they are sitting on the Court. (Imagine if the U.S. Supreme Court Justices were all at-large members of the united States Senate.)

In a move that puts it technologically ahead of the U. S. Supreme Court, the UK Supreme Court will allow video recordings of its proceedings that will be made available to broadcasters in an effort “to be as transparent as possible in its judgments and proceedings.” And apparently, the wigs are history…

Although most Americans didn’t pay much attention, there’s lots of info and comment in the blogosphere about Britain’s new court.

First stop might be the BBC News’ fine Q&A: UK Supreme Court which provides the basics in a easily understood fashion
Cassell Bryan-Low and Jess Bravin of the Wall Street Journal provide some additional background and context in their article A U..K. Court Without Wigs.
I also rather liked Library Boy Michel-Adrien Sheppard’s selection of coverage and comments in the British press about the change. For some more of that from other publications, click here,
For the most concise rundown with some great links to related material and information about the new Supreme Court’s inaugural case, check out this post on Jurist.
SCOTUK by Diane Marie Amann of IntLawGrrls blog focuses on the first case now before the new Supreme Court of United Kingdom which relates to the freezing of assets in a terrorism suspect case.
And there is a fledgling UKSC Blog which appears to intend to emulate the well known SCOTUS blog

‘Course not everyone’s happy about the new court as you can see by visiting The Not-Supreme Court of the United Kingdom post on the The TaxPayer’s Alliance website which opines that

The proper name should be the Not-Supreme Court, or perhaps the Supreme-ish Court. This is because British law is not in fact supreme in our country, European law is.

And from more mainstream media, Fear Over UK Supreme Court Impact is reported by the BBC News in an interview with Lord Neuberger who didn’t want to make the transition to the new court. According to Lord Neuberger, there is a real risk of

judges arrogating to themselves greater power than they have at the moment…. [The UK Supreme Court seems to have been created]as a result of what appears to have been a last-minute decision over a glass of whiskey… The danger is that you muck around with a constitution like the British Constitution at your peril because you do not know what the consequences of change will be.

My Dad’s take on it? “Supreme? Not really. Parliament is still supreme. Furthermore, in some instances the final word lies with the EU’s Court of Justice.” So one interesting conundrum in the years ahead for the new UK Supreme Court is that although it may be more independent domestically from other branches of government than in the past, its overall power may be become less as Europe becomes more one.

One thing I don’t get, however, is why you’d swap the neat names these folks used to have – Lords of Appeal in Ordinary – to being simply a “Justice” And I’m really surprised and disappointed they couldn’t come up with something a bit more, well British, than ”President” to refer to the head Justice.

Our legal heritage has deep roots across the pond. Now it seems that the child may be influencing the parent. Always interesting to compare the answers each finds.

Going Once, Going Twice, Sold to the Plaintiff for $XX - Attending a Foreclosure Sheriff's Sale in Ohio

Teri Rasmussen — Fri, 16 Oct 2009 16:46:42 -0500

This morning I went down to the weekly Franklin County Sheriff's Sale to bid on a property for a client. I don't get down there for this sort of thing that much anymore - paralegals and clients themselves tend to take the duty - but it was interesting to see both what was the same and what had changed from when I was the designated attendee years ago.

In the "old days", i.e. more than 20 years ago, sheriff's sales in foreclosures really did happen on the courthouse steps in some places. Here in Franklin County, Ohio, sheriff's sales in foreclosures were done in the lobby of the Common Pleas Courthouse by a burly looking guy standing behind an enormous wooden podium (which is actually still there) and wielding a gavel. It was noisy and necessarily a tad uncomfortable because it was strictly a standing only event with no seats. And there really was a bit of a sense of drama as folks milled around waiting for the sale to begin. And the actual fall of the gavel was a nice touch too.

Today, Franklin County sheriff's sales in foreclosure cases take place in a large nice quiet carpeted auditorium/room on the first floor of the courthouse with plenty of seats for everyone. Three women - substantially less intimidating than I remember the guy doing it years ago - run the sales from a podium on a stage raised about 6 feet at the front of the room. Then there are about a dozen table desks, well spaced in 3 rows, for the "regulars" who attend the event every week and may be bidding on multiple properties. And for the rest of us, a couple of rows of reasonably comfortable chairs set up behind the special desks. It is obviously a far more sensible arrangement, but at least to me, it somehow just doesn't quite seem as "official" -- although of course it is.

Promptly at 9 AM every Friday (the time and day for sheriff's sales vary from county to county), the foreclosure sales begin. First, all of the properties being withdrawn from sale, mostly because of bankruptcy filings but also possibly because they have been brought current or for some other reason, are read in alphabetical order by debtor. Then each property is called in turn, again alphabetically by the principal defendant owner. (Other counties may use a different order.) Since my case involved a debtor defendant whose name started with "W", I was there for quite a while... and began to really appreciate the progress represented by the provision of those chairs.

So what happens, exactly? Each sale is announced in the same way:

Big Bank v. Jones at 123 Columbus Street,

[Case No.] 08-XXXX,

Attorney Rasmussen,

Appraised $XXX,XXX,

Deposit $XX,XXX [in Franklin County and many other Ohio counties, this is at least 10% of the appraised value, although the plaintiff lender can require more],

Parcel No. XXX-XXX-XXXX

And then, a brief description mentioning the subdivision or other identifying information is mentioned, followed by the words:

Commonly known as 123 Columbus Street. I need an Opening Bid of $XXX,XXX [here in Ohio this would be two-thirds of the Appraised Amount]

At this juncture, bidding is open to everyone in attendance. Sheriff's sales are open to the public. It is not necessary to be an attorney, or even a paralegal, to bid. Nor do you even have to be a resident of Ohio. You do not have to register in advance, or even on the day of the sale, to attend or bid. You do, however, have to be there in person. Eventually, sheriff's sales may carch up with technology, but for now there's no bidding by telephone or on-line and no streaming video of the sales as they happen.

For most properties, there's not much interest. Sometimes even the foreclosing plaintiff lender doesn't bid. In these cases, the words "No Bid, No Sale "are intoned and the property will be reappraised at a lower value and offered for sale some subsequent Friday. If, as often happens, the plaintiff lender makes the opening bid at the required minimum amount (and ocasionally for a bit more) and everyone else sits on their hands, the representative of the Sheriff's office simply says "Sold to the Plaintiff for $XX".

In the relatively rare situation in which there actually is some interest in the property being offered at foreclosure sale, bidding begins at the minimum bid amount, frequently kicked of by the plaintiff lender, and it goes from there. There is no "auctioneer" in the sense of someone rattling on trying to coax higher bids as you might see in an ordinary auction. Rather interested bidders simply speak up and the Sheriff's representative repeats the amount and pauses to see if anyone else wishes to place a higher bid. If bidding gets bogged down, certain minimum increments may be imposed, but for the most part, bidding increases in the amounts desired by those bidding. When it appears that no one wishes to place a higher bid, the iconic words "Going once, going twice, sold to... " are spoken, bringing the sale to an end.

At this point , the successful bidder must bring his properly completed Real Estate Judicial Sale Purchaser information Form and a Cashier's Check (no personal or company checks permitted except for lienholders) in the amount of the required deposit to the front of the room and hand it to the Sheriff's representative. THIS MUST HAPPEN IMMEDIATELY - there is no waiting for the successful bidder to "go out to their car" or over to the nearest bank branch to get the check - IMMEDIATE means NOW and if the deposit check isn't forthcoming or the paperwork is otherwise not in order for some reason, the property will be immediately resold right then and there! (That actually happened once today although I don't know exactly what was wrong.)

And then it's over. No gavel now... they just move on to the next property. It's then up to the plaintiff lender's attorney to prepare a Confirmation Order within 3O days naming the successful bidder and specifying how the proceeds of sale are to be distributed in accordance with the applicable priority of the various lienholders. The sheriff's deed conveying the real estate to the successful bidder and new owner must be prepared within 7 days after entry of the Confirmation Order and submitted to the Sheriff's office. Sometimes it can then take quite a while after that before the deed actually gets recorded. Once the Confirmation Order is entered by the Common Pleas Court, there is NO EQUITY OF REDEMPTION allowing the defendant to regain possession of the real property and the sale is final.

For more information about how Sheriff's sales are conducted here in Franklin County, Ohio, visit the Franklin County Sheriff's website and click the "Civil Real Estate Sales" button on the left hand side of the page. You can also find lists of properties to be sold at upcoming foreclosure sales, as well as the results of recently completed sales here - the results from today's sale were up by lunchtime. Because Ohio's foreclosure law has recently changed, it may also be worthwhile to review the informational WHAT YOU NEED TO KNOW AS A POTENTIAL THIRD PARTY PURCHASER material made available there.

All in all, a fairly interesting Friday morning.

For another person's account of the experience, visit A Trip to the Franklin County Sheriff's Weekly Real Estate Auction.

Reaching a Judgment Debtor's Patents and Other Intangible Property Through a Creditor's Bill

Teri Rasmussen — Sat, 10 Oct 2009 14:30:43 -0500

Because getting a judgment and actually getting paid on the judgment are two very different things, it may be worthwhile to "think outside the box" when it comes to finding ways to collect. If a judgment debtor has patents or other intellectual property, has money coming to them through a bequest under a will, or owns other intangible property, a creditor's bill may just be the creative solution.

In Ohio, a creditor’s bill action may be used to reach assets of a judgment debtor that might not otherwise be difficult to subject to judgment liens, executions, or garnishment. In re Estate of Mason, 109 Ohio St.3d 532, 849 N.E.2d 998, 2005-Ohio-3256. It is authorized by Ohio Rev. Code §2333.01 which states in its entirety:

Equitable and certain other assets

When a judgment debtor does not have sufficient personal or real property subject to levy on execution to satisfy the judgment, any equitable interest which he has in real estate as mortgagor, mortgagee, or otherwise, or any interest he has in a banking, turnpike, bridge, or other joint-stock company, or in a money contract, claim, or chose in action, due or to become due to him, or in a judgment or order, or money, goods, or effects which he has in the possession of any person or body politic or corporate, shall be subject to the payment of the judgment by action.

Essentially, a creditor’s bill allows a creditor to reach more intangible property interests of the debtor not amenable to garnishment or attachment. Among other sorts of interests, this includes:

Interests of heirs and legatees. In re Estate of Mason, 109 Ohio St.3d 532, 849 N.E.2d 998, 2005-Ohio-3256.
Patents in which creditor does not have a security interest. Olive Branch Holdings, L.L.C. v. Smith Technology Dev., L.L.C. , 181 Ohio App.3d 479, 909 N.E.2d 671 (10^th App. Dist. 2009)
Fees to be received by attorney for legal services provided. Huntington Center Associates v. Schwartz, Warren & Ramirez, 2000 WL 1376524 (10^th App. Dist.).
Breach of contract claim. Lakeshore Motor Freight Co. v. Glenway Ind., 2 Ohio App.3d 8, 440 N.E.2d 567 (1^st App. Dist. 1981).

So how does one put this sort of remedy in motion? First, it is important to understand that judgment on the underlying claim must have been obtained. Then the judgment creditor must file a new lawsuit against the judgment debtor and any third party holding the intagible property owned by the judgment debtor.

The creditor's bill complaint must state that the debtor does not have sufficient personal or real assets subject to execution and levy to satisfy the creditor's outstanding judgment. This is more than a technicality. To be successful, a creditor must in fact present evidence of the debtor's insufficient assets and this must be something more than counsel's recitation of facts such as the debtor no longer being in business and conclusory statements. Graybar Electric Co., Inc. v. Keller Electric Co., Inc., 113 Ohio App.3d 172, 680 N.E.2d 687 (9^th App. Dist. 1996). Thus, for best results, it may be wise to take a judgment debtor examination or attempt garnishment before filing this sort of action.

Once the creditor's bill case is filed, the creditor then obtains a lien on the intangible property sought and will have priority over other judgment creditors who have not pursued collection of their judgment in this way.

The Ten Most Important Things to Know about Cognovits and Confessions of Judgment in Ohio

Teri Rasmussen — Tue, 06 Oct 2009 05:49:54 -0500

I'm finishing up my recent series of posts on cognovit notes and judgments with a summary of the key things to know about cognovit notes and judgments in Ohio.

1. Shortcut to Judgment. Cognovit notes provide a shortcut to judgment, allowing a creditor to take a judgment immediately (and I mean within MINUTES) of the filing of the Complaint. No advance notice to the debtor required. For more information on how this works, visit my Cognovit Promissory Notes Explained post.

2. Few States Allow. Ohio is one of only a handful of states permitting cognovit judgmentsnat all. In fact, as far as I know, they are only enforceable in OHIO, Pennsylvaina, Maryland, Virginia and Delaware. Visit An Examination of Confession of Judgment Statutes in the Mid-Atlantic States for a very concise and specific summary of what is required in each of these states for a valid cognovit note. In Indiana, it's even a Class B misdemeanor (punishable by a $1,000 fine or 180 days imprisonment) to include cognovit language in a promissory note or to try to enforce a cog taken somewhere else like, say, Ohio. Indiana Code 34-54-4-1

3. Commercial Deals ONLY. Cognovit notes are valid ONLY in commercial transactions involving businesses and are not enforceable with respect to consumer obligations. Ohio Rev. Code 2323(E).

>>>>>> The rest of these points pertain ONLY with respect to Ohio cogs.

4. Follow the Statute. DO NOT VARY IN ANY WAY WHATSOEVER THE LANGUAGE OF THE STATUTORY COGNOVIT WARNING. The cognovit warning should appear IMMEDIATELY (and I mean WITHOUT ANYTHING IN BETWEEN) above(preferably) or below the signature line and should look EXACTLY like this for best results:

WARNING – BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU RGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.

5. Confession of Judgment Must Also Be included. Do not forget to include the enabling language authorizing confession of judgment within the body of the promissory note, guaranty or other instrument. If the enabling language is not included, the instrument will still be enforceable but will not be any good for taking a cognovit judgment. Klosterman v. Turnkey-Ohio, L.L.C., 2009-Ohio-2508 (10th App. Dist.). The statute does not specify the exact language to be used, but over time certain language has customarily come to be used in virtually every Ohio commercial note or guaranty.

6. Enforceable Where Signed or Where Maker Located. Cognovit judgments must be taken in (A) the County in which the cognovit note was signed; OR (B) the County in which the individual resides or the business has its principal office. Ohio Rev. Code 2323.13(A)

7. Not Required to Use Business Courts. At least for now, the existence of commercial law dockets/business courts does not require cognovit judgments to be taken by a judge of that docket GLIC Real Estate Holding, L.L.C. v. 2014 Baltimore-Reynoldsburg Road, L.L.C., 906 N.E.2d 517, 2009-Ohio-2129 (Common Pleas-Franklin Cty)

8. Signing Cog Doesn't Create Attorney-Client Relationship. No attorney client relationship is established when an Ohio attorney signs a cognovit answer on behalf of a defendant. It is simply a ministerial act and does not subject the attorney signing the answer to any claim of unethcialconduct.. Opinion 93-3 Ohio Supreme Court Board of Commisioners on Greivancxes and Discipline, Dibenetto v. Miller, 180 Ohio App.3d 69, 2008-Ohio-6506 (1st App. Dist.).

9. Copies May Do. While many Ohio courts may require or at least expect the original promissory note containing the cognovit provision to be produced, the statute does permit use of a copy. Ohio Rev. Code 2323.13(A). Good luck with that one - call me when you're able to get the judgment without showing the original of the note to the judge.

10. Getting a Do-Over. It does not take as much to open up a cognovit judgment thorugh a Rule 60(B) motion as it does with rexpect to other judgments. However, you have to at least show that a meritorious defense exists, at least in theory. Visit my previous post What It Takes to Open Up a Cog Judgment to find out more details.

A Lender's "Indulgences" Curtailed?

Teri Rasmussen — Thu, 01 Oct 2009 13:39:12 -0500

When I hear the word "indulgences", my mind immediately goes to something "sinful" and well, probably fun. In this case, however, I'm talking about that ubiquitous provision found in loan documents designed to allow lenders to continue to hold borrowers and gurantors liabile notwithstanding the lender's failure or inability to abide by the letter of the loan documents or to exercise all or some subset of its rights upon default in a manner saitsfactory (usually with the benefit of 20-20 hindsight) to the borrower and/or gurantor. Does this stuff really worK?

Suppose you have this deliquent borrower - let's call him "B" -- on a promissory note (though it could be any obligation) and collateral not worth enough to pay you off in full. But then you also have this guarantor -- let's call him "G". Somewhere along the line one of your folks messed up in that "commercial reasonable sale" thing that's supposed to happen when you repossess and liquidate collateral. Or maybe you let a financial covenant default here and there pass for the time being. Or perhaps you just extended the maturity date or went interest only for B for a while. Question is whether you're still OK because you can hold G - who does have assets - liable for the obligation.

Most, if not all, bankers and their counsel would say "yes" because both the UCC and our loan docs say we can. Which is why Huntington National Bank v. Wallace, 2009 WL 2023891 (N.D. Ohio 2009) -- now on appeal to the Sixth Circuit and the subject of my last post -- is an important case to watch.

In a nutshell, the Bank had allowed advances to the Borrower to fund draws on letters of credit in excess of a "maximum amount" specified in the loan documents and the Bank was pursuing one of the guarantors, Bank took cognovit judgment and guarantor sought relief from judgment Federal district court held that the indulgence clause was not sufficient to preclude relief from judgment.

Initially, as a lender-oriented attorney, the case concerned me. It seemed to suggest that lenders permitting any sort of modification -- other than the most vanilla extension of time sort --would now be accepting a substantially greater risk that such forbearance would relieve any guarantor not explicitly consenting from liability. In addition, the manner in which it brushed aside the waivers contained in the “indulgence” clause as inapplicable sent a cold shiver down my spine. And the logic of the ruling would be applicable not just to cognovit notes, but really any sort of obligation. So, taken as a whole, if upheld by the Sixth Circuit, the decision seemed likely to convince many lenders that it simply was not in their best interests to work with delinquent borrowers.

As I've thought about it more, however, I've begun to think this decision makes more sense and is less alarming than I had first surmised. The decision in fact makes an important distinction between the nature and extent of the obligation intended by the parties to be guaranteed on the one hand and mistakes and errors made by the lender in enforcing the guaranty on the other. In this particular case, the guaranty was never intended to be unlimited - there was a clearly stated unambiguous cap on the amount of credit to be extended to the borrower at particular times. In continuing to permit advances to fund letter of credit draws, the Bank exceeded this previously agreed limitation on the amount for which the guarantor had accepted responsibility for seeing was paid.

When read closely, the language itself – and certainly the concept originally underlying inclusion of such a clause – is about the consequences of the Bank’s inaction or failure to take appropriate steps to ensure the obligation guaranteed could be satisfied from sources other than the guarantor. When viewed from this perspective, the decision leaves largely intact a lender’s ability to rely on indulgence clauses with respect to events and actions occurring during the course of a workout situation. It is only a lender’s decision to continue extending credit to the borrower beyond an explicitly agreed–upon point that becomes a problem.

Granted, the ruling is still worrisome. In asset-based lending, a lender may unknowingly extend credit beyond the “availability” permitted pursuant to a borrowing base calculation formula. And in the Wallace case, the Bank was obligated to honor letters of credit previously issued and really did not have the ability to refuse to make further advances.

What also makes things a bit problematic for me in this case is that the “cap” in question was only for a very short, almost temporary, period of time and was substantially less than it was at other times. Had the events occurred but a couple of months earlier or later, the cap would not have come into play.

For me, the take-away lessons for now from this case are:

If at all possible, obtain guarantor consent to any modifications or waivers at the time the modifications are made or waivers given. I already do this anyway, but now it will be even more important.
If a lender wants the guaranty to truly be unlimited and/or cover over-advances, the guaranty should say so very explicitly.
Problems arising due to lack of perfection, release of collateral or other obligors, or other events and circumstances connected with an aspect of the lending relationship that do not pertain to the amount advanced are probably still within the protection of indulgence clauses.

Making a "Federal Case" Out of a Cognovit Judgment

Teri Rasmussen — Mon, 28 Sep 2009 08:00:12 -0500

How would Peanuts’ Linus manage without his trusty security blanket? Depending on the result, the Sixth Circuit reaches in a recently appealed cognovit judgment case, financial institutions such as banks and others relying on cognovit notes, and perhaps ordinary promissory notes as well, may well have to face a similar question.

Every guaranty I’ve seen has some variation of what is sometimes called an “indulgence” clause. These provisions essentially say that a guaranty remains in effect even if the Bank waives a default by the primary obligor or errs in its collection efforts. Now a federal district court, applying Ohio law, has snatched this security blanket away, saying that such a clause does not allow the lender to ignore the credit terms of a loan with impunity.

In Huntington National Bank v. Wallace, 2009 WL 2023891 (N.D. Ohio 2009) (Case No.09CV408, Carr, J.), decided August 19, 2009, the defendant guarantor alleged he had a meritorious defense justifying vacation of the cognovit judgment taken against him. His argument was that because the Bank made a “material alteration” to the terms of his guaranty by continuing to allow advances even though the amount outstanding exceeded the prescribed “maximum amount”, his guaranty obligation was rendered invalid.

The Bank has now appealed the case to the Sixth Circuit (Case No. 09-4172). If upheld, the decision may have far reaching consequences beyond cognovit notes. The district court decision suggests that the ONLY modification to an obligation that a lender may comfortably do is an extension of time unless the guarantor agrees. It could also be taken as meaning that even if the guarntor consents, such modifications would release the guarantor of all liability

Factual Background

The underlying fact scenario is a common one. In August 2007, a company known as Bellepointe entered into a First Amended and Restated Loan and Security Agreement “Loan Agreement”) with the Bank. The Loan Agreement governed three separate obligations – a term note, a line of credit, and a “Guidance Line” involving draws on letters of credit. Michael Wallace (“Wallace”), the father of the company’s owner, executed a guaranty of Bellepointe’s indebtedness to the Bank; the son also executed a guaranty, but the case pertains only to the father’s guaranty.

The guaranty excluded any liability for the term loan indebtedness and also capped the maximum amount of liability with respect to the Line of Credit. The crux of the case focused on the proper interpretation of certain language found in the Loan Agreement and the Guidance Line cognovit note, to wit:

Notwithstanding anything to the contrary contained herein, the maximum amount available under the Guidance Line shall be as follows:

from the date hereof through and including 11/30/07 - $865,000

12/1/07 through and including 12/31/07 - $250,000

1/1/08 and thereafter - $550,000

These provisions obviously required a substantial reduction in the amount outstanding as of December 1, 2007. It is not altogether uncommon for lines of credit to require a substantial reduction in the amount outstanding at least once a year.

Procedural History

Procedurally, the case is a bit complicated. Apparently there was some discussion back and forth between Wallace and the Bank concerning his liability prior to any lawsuit being filed. When those talks broke down, Wallace filed a declaratory judgment action in the Southern District of Ohio federal district court against the Bank on February 11, 2009. Two days later, the Bank took a cognovit judgment against Wallace in Lucas County Common Pleas Court. The Bank said it had no knowledge of the declaratory judgment action when it took the cognovit judgment.

Wallace promptly removed the state court cognovit judgment action to federal district court for the Northern District of Ohio, apparently on diversity grounds that he was a resident of Florida, and sought relief from judgment. After the Northern District federal court granted the motion to vacate the cognovit judgment, the Bank appealed to the Sixth Circuit where the case is now pending. It appears likely that the Southern District declaratory judgment action will be consolidated with the pending Northern District cognovit action.

The Decision

Wallace alleged that the Bank continued to make advances on the Guidance Line in December 2007 even though Bellepointe had failed to reduce the amount outstanding as required. Consequently, he contended that the Bank’s actions caused a “material alteration” in the nature of his guaranty obligation, thereby relieving him of liability under his guaranty. The Bank did not dispute that the advannces exceeded the "maximum amount." However,it countered by pointing out that its loan documents had one of those “indulgence clauses” which stated:

Guarantor hereby promises that if one or more of the Obligations are not paid promptly when due, he will pay the Obligations to Bank, irrespective of any action or lack of action on the Bank's part in connection with the acquisition, perfection, possession, enforcement or disposition of any or all Obligations.... Guarantor agrees that no extension of time, whether one or more, nor any other indulgence granted to [sic] Bank by [sic] Debtor, or to any other gurantor, or any of them, and no omission or delay on Bank's part in exercising the right against, or in taking any action to collect from or pursue Bank's remedies against Debtor or any other guarantor, or any of them, will release, discharge or modify the duties of guarantor hereunder.

In addition, the Bank insisted that it was obligated to pay the draws on outstanding letters of credit in any event and that the definition of “advances” used in the line of credit differed from the definition of “maximum amount available” for precisely this reason. It also argued that the “indulgence” provisions in Wallace’s guaranty allowed it to ignore Bellepointe’s default in any event.

So what happened? The federal district court agreed that the provisions of the loan documents did allow the Bank to continue making advances in December 2007. However, the court also noted that “Wallace’s burden is only to allege a meritorious defense, not to prove that he will prevail.” It went on to say:

Even if Wallace had initially failed to allege sufficient facts to support his defense, he has subsequently submitted an affidavit describing the above referenced facts, Wallace alleged sufficient facts for this court to evaluate whether his defense is meritorious.

And the reason? The Court cited Toland v. Key Bank of Wyoming, 847 P.2d 540 (1993) and Frost National Bank v. Burge, 29 S.W.3d 580 (Tex. App. 2000) for the proposition that “’indulgence’ is limited to extensions of time for payment and contract terms permitting indulgences do not waive suretyship defenses.” That’s it! Really isn’t any further analysis or discussion.

What IS interesting and informative are the briefs of the parties filed in the federal distriuct court case. Leaving out exhibits, but including affidavits,here they are:

Now I think the district court got this wrong and I’d really have appreciated a little further analysis of the pertinent provisions in the loan documents so I could fully understand the Court’s reasoning. However, I also think the Sixth Circuit proceedings will be rather interesting to follow in the months ahead for lender attorneys everywhere. I’ll share my thoughts about the decision in more detail in my next post.