Hi, How Can We Help You?

Category Archives: Business & Civil Litigation

Kentucky Law Places Limitations on the Interest Rates Lenders Can Charge

Author By Sean GarzaPosted on

Banks and other loan providers in Kentucky must follow strict state laws regarding the interest rates they may charge. What follows is a brief summary of interest rate laws in the state.

Legal maximum rates and judgment rates

In Kentucky, the maximum legal interest rate is 8 percent, unless the parties agree otherwise. Even in those exceptions, parties may not agree to a rate that is more than 4 percent over the discount rate of the Federal Reserve Bank or 19 percent (whichever is lower) for principal amounts of $15,000 or less.

The standard interest rate for court judgments is 6 percent, but if the obligation arose from a contract that specified a different rate, then that contract rate still applies, no matter if it’s higher or lower than 6 percent.

Home loans

Kentucky law has a variety of stipulations aimed at preventing predatory lending practices. For example, residential mortgages between $15,000 and $200,000, with closing costs of either $3,000 or 6 percent of the total loan, have special rules associated with them. Lenders may not charge prepayment penalties for these loans unless the borrower receives a written offer without a prepayment penalty. Then, if that offer gets rejected, the penalty cannot be more than three percent for the first year, two percent for the second year, one percent for the third year or any amount after three years.

Lenders can charge fees to change or renew a high-cost home loan or defer payments unless the fees are less than half the fees to refinance or the borrower is in default and the modifications are in the borrower’s best interest.

About Finney Law Firm, LLC

Founded in 2014, FLF has grown to 15 attorneys located in offices in Eastgate and downtown Cincinnati with five major practice areas: Corporate Law, Real Estate Law, Employment Law, Commercial Litigation and Public Interest and Constitutional Litigation.  FLF has the unique claim to three 9-0 victories at the United States Supreme Court for its public interest practice along with breakthrough class action work.

FLF also has an affiliated title insurance company, Ivy Pointe Title, LLC, that closes and insures nearly a thousand commercial and residential real estate transactions annually.

For more information about Finney Law Firm, visit finneylawfirm.com.

Media Contact: Mickey McClanahan; mickey@finneylawfirm.isoc.net; 513.797.2850.

 

Ohio commercial litigation: Chasing deadbeats, it’s part of what we do!

Author By Christopher P. FinneyPosted on

Someone owes you money.

But you have been slow to assign the collection to an attorney for fear of the legal fees and expenses.  This concern certainly is well-founded.

However, Finney Law Firm (a) has the experience, tools and “attitude” to maximize your return from that activity, and (b) is willing to work with you on creative fee relationships, so that the risk and cost of the collection activity does not fall fully on the your shoulders.

The challenge

In every piece of prospective litigation, I attempt to analyze with the client the three components to litigation success: (a) liability (establishing the legal basis the other party owes you money [for example, is the contract clear and the breach easy to establish?]), (b) damages and (c) collectibility.

Collectibility

Let us start at the end: does this target defendant have a pot to pee in?

If you were to get a judgment of any size against him, could we collect from this debtor the sums needed to make the litigation worthwhile form the inception?  Many times the answer is “no.”  If so, you might want to walk away from the matter.

Does the debtor own a house?  A business property?  If so, we can fairly quickly ascertain the mortgage indebtedness versus the value of the property.

Does the debtor own a business?  Car?  Other assets?  Many times debtors structure their lives and their assets in such a way that a creditor really can’t get anything from them — their house in in their wife’s name, and their other assets are well-hidden.

Liability

Ahhh, liability.

The client many times relates to us that liability is “open and shut.”  We file suit and the other side “surely will settle.”

Unfortunately it does not always pan out that way.  Clients frequently don’t understand the facts of their own case, don’t know all the facts, and wear rose-colored glasses about their prospects of success.  Further, even the simplest fact pattern that clearly leads to liability can be time-consuming and laborious in Court to bring to conclusion.

The client needs a realistic understanding of their chances of success and the Court path to a final enforceable judgement.

Damages

And that brings us to the damages calculation.  Defendants, Plaintiffs and Courts all have differing perspectives on how to calculate damages numbers.  And a separate blog entry would have to explore that issue in more depth.  But take, for example, the sale of a house.  Our client is the seller.  The buyer is clearly in breach.  But the seller sixty days later re-sells the house to another buyer for $5,000 more than the buyer in breach agreed to pay.  (And in today’s go-go real estate marketplace, that’s not an uncommon occurrence). What “damages” has the seller sustained from a clear breach of contract?  Other than the time-value of holding the property (taxes, insurance, utilities and maintenance), likely none.

Collection

So, once you file suit and convince the Judge to sign the entry granting an award of damages against a defendant,  you are “off to the races,”  Right?  Well, not exactly.

We have to first identify assets and income streams.  Does the target own a piece of real property?  A bank account?  A job? Securities accounts?  Do they own a closely-held business?  The Finney Law Firm has gum-shoe and cyber assets and relationships that help us to learn of the income and assets of clients in the collection process.

Tools for enforcement

Our tools to force payment of a legal judgment include:

  • Attaching bank accounts.
  • Garnishing wages.
  • Liening and foreclosing on real property.
  • Seizing and selling personal property such as office furniture and equipment, cars and manufacturing equipment. (This one usually gets their attention and frequently a quick check!)
  • A creditor’s bill to force a third party who owes the deadbeat money to instead pay it to you.  These are very powerful.
  • A receivership to place income-producing assets in the hands of a third party whose job it is to assure you are paid from the income stream of the asset or its liquidation.
  • A Judgment Debtor Examination forces a creditor to tell you — under oath — where they are “hiding” their assets so that you can go and grab them.
  • Use of subpoena power to learn from third parties where assets are being hidden.
  • Working through the intricacies of bankruptcy court to either avoid the collections limitations the Court imposes or maximize the collection through their offices.
  • Involuntary bankruptcy.  It takes three creditors banding together to place a debtor into bankruptcy, but this tools forces all the debtor’s cards on the table and stops them from playing games with assets that should belong to you.
  • Fraudulent transfer actions can un-do illegal transfers of assets to friends and family members.  Most powerfully, the act of the fraudulent transfer to these third parties causes them to become defendants in that new action —  putting them on the hook for the debt, plus punitive damages and attorneys fees — for participating in the scheme.

Creative fee relationships

We are not oblivious to the challenges our clients face of withering legal fees and endless court appearances to collect a small and simple debt.  But at the same time, the tremendous work many times required to get a judgment and pursue it through collection also is known to us.

However, if we are going to recommend that a client proceed with a collections action — which necessarily means the economics should work out positively for the client — we are always willing to engage in a discussion about creative fee relationships (hourly fees, flat fees and contingent fees) to achieve the desired end.

The idea on a contingent fee is the more you collect, the more we make — everyone should be happy if the “ring the bell.”  But on the flip side, it it turns out to be a dry well — and many collection actions that seem promising on the front end turn out to be a dry well on the back end — then we share in the pain.

Conclusion

Collections work can be great fun, outmaneuvering a defendant who knows he owes the debt, but is using his wits — legal and illegal — to prevent you from getting to those assets.

So, let your deadbeats become our firm’s problem and allow us to turn that bad debt into an asset.  Call Chris Finney (513-943-6655) or Julie Gugino (513-943-5669) to learn how we can help you.

Foreign Corporation Primer: Register before filing suit

Author By Finney Law FirmPosted on

One important but often overlooked provision of Ohio corporate law is the requirement that “foreign corporations” (meaning any corporation established outside the state of Ohio) must obtain a license to transact business within the state of Ohio when doing business in Ohio.

No foreign corporation. . .shall transact business in this state unless it holds an unexpired and uncanceled license to do so issued by the secretary of state. To procure such a license, a foreign corporation shall file an application, pay a filing fee, and comply with all other requirements of law respecting the maintenance of the license as provided in those sections.

R.C. 1703.03.

Although a failure to obtain a license does not invalidate any contracts a foreign corporation enters into in Ohio, a lack of registration means that a foreign corporation cannot maintain a lawsuit in Ohio courts.

The failure of any corporation to obtain a license…does not affect the validity of any contract with such corporation, but no foreign corporation that should have obtained such license shall maintain any action in any court until it has obtained such license. Before any such corporation shall maintain such action on any cause of action arising at the time when it was not licensed to transact business in this state, it shall pay to the secretary of state a forfeiture of two hundred fifty dollars and file in the secretary of state’s office the papers required by divisions (B) or (C) of this section, whichever is applicable.

R.C. 1703.29.

A similar provision for foreign limited liability companies is located at R.C. 1705.58.

This is a common provision throughout the United States. In Kentucky the requirement is codified at Kentucky Revised Statute 14.9-20.

A recent Hamilton County Court of Appeals case highlights the importance of licensing your foreign corporation. In LV REIS, Inc. v. Hamilton County Board of Reviison, et al., C-160732. the First District Court of Appeals upheld the Common Pleas Court’s dismissal of a case brought by a Nevada corporation that had failed to register with the state before filing a Board of Revision appeal in the Common Pleas Court.

Had LVREIS been successful in the underlying case, it would have saved approximately $17,000 in property taxes per year – making the failure to register a costly oversight. It should be noted however, that even though the Common Pleas Court granted the motion to dismiss, it also provided some analysis of the merits of the appeal, suggesting that LVREIS would not have prevailed had the case been decided on the merits. 

If you are operating a foreign corporation or limited liability company in Ohio, this case should serve as a warning to make sure you’ve properly registered in every state in which you operate. If you are not currently registered in Ohio, you can register now.

For those involved in disputes with foreign entities corporations, this can be an important defense to raise in litigation, as even though a foreign corporation can cure the defect prospectively, the case law suggests that if an unregistered foreign corporation files suit but later registers with the state, such registration does not cure the lack of jurisdiction.

Contact Finney Law Firm for assistance with your corporate or property tax matter here.

Ohio Commercial Law: Is an obligation “joint and several” if the instrument is silent on the topic?

Author By Julie M. GuginoPosted on
Attorney Julie M. Gugino

“Joint and several liability” is a legal concept that provides that each obligor under a contract is fully liable for the obligations under that contract as to the other party to the contract (i.e, the party to whom the joint obligors are obligated).  So, in the instance that two or more guarantors sign a guarantee instrument to a bank for a loan, if they are “joint and severally liable,” it means that each guarantor owes the entire debt to the bank in the event of default.  The bank can’t collect twice the guaranteed amount, but it can choose which guarantor from which to obtain payment.

So, the question addressed in this article is “what is the default position as to joint and several liability on a contract if the instrument is silent on the topic?”  We address topic this under Ohio and Kentucky law.

The answer: In short, “joint and several” is the default interpretation absent language in the instrument that absolves parties of such liability.

General Contract Principles

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Restat 2d of Contracts, § 1 (2nd 1981). Further, where there are more promisors than one in a contract, some or all of them may promise the same performance, whether or not there are also promises of separate performances. Restat 2d of Contracts, § 10 (2nd 1981). Such is the situation when more than one individual signs a guaranty or a promissory note.

Standard contract language

The standard modern form to create duties which are both joint and several is “we jointly and severally promise,” but any equivalent words will do as well. In particular, a promise in the first person singular, signed by several persons, creates joint and several duties. Restatement (Second) of Contracts § 289 (1981). What this means is that, generally, under the common law, promises of the same performance create “joint” liability on the part of each promisor unless an intention is manifested to create a “solidary” obligation. Restat 2d of Contracts, § 289 (2nd 1981). However, many states have state specific statutes which have altered or refined this rule.

Common law when contract is silent

In Ohio, an individual signing a note as a co-maker with another individual is jointly and severally liable for the debt, except as otherwise provided in the instrument. Ohio Rev. Code Ann. § 1303.14(A). Star Bank, N.A. v. Jackson, 2000 Ohio App. LEXIS 5567, *1. Under U.C.C. Art. 3, a party signing a promissory note as a co-maker is jointly and severallyliable for the debt. Darrah v. Leakas, 1994 Ohio App. LEXIS 220, *1. As among themselves, co-makers are presumed liable in equal amounts, however, these rights are governed by the particular terms of the contract between the co-makers. Poppa vs. Hilgeford, 1982 Ohio App. LEXIS 13658, *1.

In Kentucky, likewise, in the absence of an express agreement to the contrary, when two or more individuals execute a note, such persons are jointly and severally liable to the holder, even though the instrument contains no such express provision.  KRS 355.3-118. Schmuckie v. Alvey, 758 S.W.2d 31, 33-34.

Duty of contribution from co-makers

As between or among themselves, however, in the absence of evidence of a contrary agreement, co-makers are presumed to be liable in equal amounts and a right of contribution, based upon an implied contract of reimbursement and not the instrument, exists between or among them. 11 Am. Jur. 2d, “Bills & Notes” § 588 (1963). Id.

Conclusion

What this means is that if you sign a note or guaranty or other like instrument with another individual, the holder of that note, in their sole discretion, can choose to recover the full amount against you and only you. As between you and your co-maker, depending on your agreement, you likely retain the right to seek contribution from them pro-rata.

For more information on commercial instruments and personal guarantees, contact Julie Gugino at (513) 943-5669.

Ohio commercial transactions: Think twice before signing these six transactional documents

Author By Christopher P. FinneyPosted on

As we march through our lives, folks shove documents under our nose for signature all the time.  In reality, we should carefully, very carefully, read them and consider their implications before signing any of them.

After all, there are charlatans and fraudsters standing eager to take advantage of us at every turn.  And even if other parties don’t start out as such, life events can put people in default or desperate straits – and then “desperate people do desperate things” as they say.

Still, certain documents bear significant additional risk or have a history of resulting in litigation or economic calamity for the signer.

Here, we take a serious look at six transactional documents that frequently result in legal or financial problems:

  • Personal guarantee for debts of another. Your daughter and son-in-law are buying a house, but have bad credit, or you are starting a business and need to guarantee the lease or franchise agreement to provide the fiscal backing for the undertaking.  A personal guarantee is fine and in some instances both called for and reasonable.  But think it through:

–>  Am I financially capable of fulfilling this guarantee if the underlying obligation falls into default?

–>  Would the other party accept a guarantee limited in time, amount or some other cutoff?  Or proceed with no guarantee?

–>  If there are multiple guarantors, would the lender be satisfied with me just paying my pro-rata share of the underlying debt?

–>  Is there some other way that the transaction can proceed without my guarantee?  Can someone offer security for the loan instead?

  • Non-Compete agreements. More and more employers are asking new employees to sign non-compete agreements or agreements wherein the employee agrees not to solicit customers, employees or vendors of the enterprise.  Employers are entirely within their rights to demand such agreements (the question of whether they are enforceable is addressed here).  But should an employee agree to restrict his future earnings potential and career path based upon this job opportunity?  If you really think it through, many time the answer is “No thanks, I’ll take a pass.”
  • Agreements with attorneys. We really hate to say this, but one of our clients was a seller under a land installment contract for the sale and purchase of real estate.  The buyer was an attorney.  After repeatedly falling into default, our client initiated a forfeiture action against the attorney.  He countered with a blistering series of arguments that were all untrue or frivolous.  Confronted with withering legal bills to prove their case, they quickly settled on relatively unfavorable terms.  Lesson learned.
  • Businesses with 50/50 ownership. It seems to make sense: Two partners throwing in equal shares of cash and effort to start a business; they should own it 50/50.  And in decision-making, decisions are 50/50, meaning it requires the consent of both parties to move forward with anything.  However, after years of addressing business disputes, it has become clear that these ownership structures – with no one in charge and everyone’s cooperation required to make decisions – are the source of operational and legal gridlock, resulting in painful, expensive and endless litigation.  I have even seen very difficult dispute resolution between former (or soon-to-be-former) spouses in a 50/50 ownership structure.  Indeed, getting into business with any third party can be the source of conflict, monetary losses and litigation.
  • Agreements you are not prepared to litigation to conclusion. If you think about it, in an instance in which you are investing time or money, you have two essential choices: Either be prepared to “eat” these investments by walking away or be prepared to litigate your claims to conclusion to defend your investment.  Is the person you are contracting with someone you are prepared to sue to enforce your rights?  Is the transaction structured and documented in such a way that you could prevail in that litigation? Will the cost of enforcing these agreements (or defending against a suit from the other party) of such magnitude that it will be worth litigating?
  • Indemnity and “hold harmless” clauses in leases and other contracts. It’s easy to sign a 50-page legal document that satisfies the major business terms you have negotiated.  But what about the fine print?  Buried deeply within a lease, loan documents, or asset purchase contracts can be all sorts of warranties, indemnities, and “hold harmless” provisions.  It seems simple that a seller or borrower should stand behind his obligations, but do you really want to give an open-ended contractual indemnity or warranty in this specific instance?  It is, as is addressed here, a potential blank check, open-ended access to your checkbook.

We are not saying that you should never sign any of the foregoing instruments.  What we are saying is that experientially these undertakings result in much conflict, legal fees and emotional angst, and should be undertaken only with great caution.

 

Ohio commercial law: Can a seller sell that which he does not own?

Author By Christopher P. FinneyPosted on

An issue that manifests itself in any number of scenarios is the seemingly odd question: Can a seller contract to sell something that he does not own.

Somewhat surprisingly, the answer can be “yes.”

Hypothetical sale of stock

Let’s take a theoretical situation in which a seller promises to sell to a buyer 1,000 shares of the Procter & Gamble Corporation for $100 per share on the 2nd of January, 2018 (a date that as of this writing has not yet come), but the seller does not own any Procter and Gamble at the time of making such agreement.  Is that contract enforceable against the buyer?  As against the seller?

Sure.  If the seller does not own 1,000 shares of Procter & Gamble Corporation at the time of the contract, he had better make arrangements to get that stock under his ownership or to find a party who does own those shares who will fulfill the seller’s promises.

OK, but what about real property?

But come on, that’s perfectly fine as to a publicly-traded stock, but what about property that is entirely unique, not replaceable with “equal or like-kind” property, and under the control of a third party?

Well, the same principle applies.  If the seller is going to make a binding promise to sell that asset, and he wants to avoid being sued for breach of contract, he had better figure out how to either get title to the property before the promised closing date, or otherwise arrange for the cooperation of the property owner.

The basis for fraud?

The story is as old as the bridge.  A gullible tourist goes to New York City and a local shyster sells them the Brooklyn Bridge.  The seller does not own the bridge at the time of the contract, so it’s an enforceable contract, right?

Well, in that classic case, and in the case of other instances of fraud, selling property that the seller does not own could well be a badge of fraud.  If he knew at the time of contracting that he did not have title, and could not obtain title to the property in question, then the promise to sell that asset clearly would be fraud.

What if the seller claims that he thought he would be able to obtain the asset before the promised closing date, but was just unsuccessful.  Depending on his intentions, and the affirmative representations made by seller in conjunction with the sale, the failure of performance could be simple breach of contract, or it could be actionable fraud.

The peril for the seller

The peril for the seller who does not own the asset he promises to sell is that in order to avoid claims both for breach of contract and fraud, he will need to “pay the price” to get that asset into his name before the date of his performance.  In the case of Procter and Gamble Stock, if the price on the NYSE rises of $150 per share before the first of the year, he may just need to take a loss at $50 per share to assure fulfillment of his contractual obligations.  In the case of unique property owned or controlled by a third party, the seller may be in great peril as he will be under the mercy of that seller to “name his price” and terms to transfer the asset to the seller who has promised it any a date certain to a certain buyer.

Conclusion

This concept comes into play in various scenarios.  And the first instinct of parties — and attorneys — is to think you can’t promise to sell that which you don’t own.  A seller can.  But he should carefully consider the consequences of that decision.

Ohio Real Estate Law: Triggering the Duty to Defend on a General Warranty Deed Claim

Author By Casey A. JonesPosted on
Attorney Casey A. Taylor

 

We have previously written on the different types of deeds (Real Estate 101: Different Types of Deeds in Ohio, Kentucky, and Indiana), as well as how costly it can be to breach your covenants under a general warranty deed (Real Estate 101: Breach of General Warranty Covenants Can Be Costly Mistake).  Perhaps the most common breach occurs when you transfer property that is encumbered in some way, such as by an easement or lien, and that easement or lien is not excepted from the deed. However, one of the less discussed components of a general warranty deed is the covenant to defend. Whether you are the grantor or grantee with respect to a general warranty deed, you should be aware of when this duty arises, and what it means, in order to protect yourself, your rights, and your checkbook.

Statutory duty to defend in “short form” general warranty deeds

R.C. 5302.06 states:

In a conveyance of real estate, or any interest therein, the words “general warranty covenants” have the full force, meaning, and effect of the following words: “The grantor covenants with the grantee, his heirs, assigns, and successors, that he is lawfully seized in fee simple of the granted premises; that they are free from all encumbrances; that he has good right to sell and convey the same, and that he does warrant and will defend the same to the grantee and his heirs, assigns, and successors, forever, against the lawful claims and demands of all persons.“

(Emphasis added). This means that a grantor who conveys property under a general warranty deed promises to defend the grantee and the grantee’s title against all “lawful claims and demands” of others.

What are “lawful claims and demands”?

Unfortunately, Ohio law does not provide much guidance as to what “lawful claims and demands” encompasses – this is not a defined term under the statute, nor have the courts ventured to define it in this context. A lawsuit is generally defined to be “the lawful demand of one’s right.” Ludlow’s Heirs v. Culbertson Park, 4 OHIO 5 (1829).

Additionally, in various contexts, Ohio courts have provided the following guidance as to each of the terms separately:

  • State ex rel. Grant v. Brown, 39 Ohio St. 2d 112, 116 (1974) (“To say of an act that it is ‘lawful’ implies that it is authorized, sanctioned, or at any rate not forbidden, by law.”);
  • La Fon v. City Nat’l Bank & Trust Co., 3 Ohio App. 3d 221, 223 (10th Dist. 1981) (adopting the definition of “claim” as “to assert . . . to state; to urge; to insist . . . a right or title.”);
  • Crozier, v. First National Bank of Akron, 9th Dist. Summit No. 10140, 1981 Ohio App. LEXIS 13717, *6-7 (defining “claim” as “a ‘broad comprehensive word’ that includes ‘an assertion’ and ‘a cause of suit or cause of action.’”); and
  • Eighth Floor Promotions v. Cincinnati Ins. Cos., 3d Dist. Mercer No. 10-15-19, 2016-Ohio-7259, ¶ 26 (“‘Demand’ is defined as ‘the assertion of a legal right or procedural right.”).

Thus, read collectively, a “lawful claim or demand” can be defined as “an authorized or unforbidden assertion of a right.”

Do we first have to ascertain is a “claim or demand” is lawful before duty to defend arises?

However, courts have found that the term “lawful” does not require the “claim or demand” to be meritorious before the duty to defend is triggered since this would essentially render the covenant meaningless. See Sediqe v. I Make the Weather Prods., 6th Dist. Lucas No. L-15-1250, 2016-Ohio-4902, ¶ 29 (holding that the claim or demand as it relates to the underlying duty, e.g., that the property is not free from encumbrances as warranted, need not be proven or successful before the duty arises, as “such a rule would render the duty to defend ineffective and eliminate the grantor’s right to control the defense against the claim.”). Thus, for example, a party claiming to have a lien on conveyed property need not prove the validity of their lien before the grantor’s duty to defend the grantee against such claim arises. The idea is that the grantor will step in before it gets to that point in order to defend the grantee’s title against such claims.

Does a suit have to be filed to trigger a duty to defend?

Indeed, the party asserting the claim likely isn’t even required to file suit to trigger the grantor and grantee’s respective rights and obligations under the general warranty deed. As discussed (Here), the Court in Hollon v. Abner, 1st Dist. Hamilton No. C960182, 1997 Ohio App. LEXIS 3814 (Aug. 29, 1997) did not require that the party asserting the adverse, “lawful claim or demand” bring suit before the grantor’s duties under the general warranty deed arose. In fact, the Court awarded the grantee attorney’s fees as damages in a suit initiated by the grantee because the grantee would not have incurred those fees had the grantor lived up to his obligations under the general warranty deed.

Conclusion

If you are a grantee under a general warranty deed and someone asserts a claim against your property (even if they haven’t yet filed suit), the first step to getting your grantor to defend your title as warranted is by informing the grantor that someone is asserting such a claim. As a grantor, if you receive notice that someone is asserting a claim against property that you conveyed by general warranty deed, proven or not, you will want to step up sooner rather than later. A delay in honoring your covenant to defend likely only exacerbates your grantee’s attorney’s fees (especially if your grantee has to file suit to defend his or her own title), for which you will ultimately be responsible.

Commercial Leasing: Steps to consider for tenant due diligence

Author By Christopher P. FinneyPosted on

What due diligence steps should a tenant undertake with respect to a commercial property before signing a lease?

Due diligence customary in a commercial real property purchase

Step back and consider for a moment that when we buy a piece of real property — for our home or for our business — it is prudent and customary by both the buyer and the lender to conduct due diligence investigations of the property:

  • title,
  • survey,
  • physical inspections of the structure and mechanical systems,
  • environmental, and
  • checks of governmental records for notices of liens for violations, zoning, traffic engineering, etc.

The list can seem endless.

Isn’t a commercial lease low-risk for the tenant?

But when simply signing a lease for a term of years, why should the tenant be concerned with these things?  After all, his upfront cash may not be significant (relative to a purchase) and if things don’t work out, the tenant can just leave, right?

Well, sometimes that is the case.  The cost and time needed for due diligence would outweigh the risk the tenant is undertaking by simply signing the lease and moving in.  If so, then by all means, proceed.

But, wait, consider this!

But consider these countervailing factors:

  • Tenant is spending significant monies on tenant buildout costs.
  • Tenant is spending significant monies to move, including moving of furniture, fixtures and equipment, the installation of computer and phone systems, and printing of letterhead, envelopes and business cards.
  • The disruption of your business arising from a move (and if things don’t work out a second move).
  • The image you are building at the new location.  What will be lost if a second move is necessary?  Think of a restaurant or bar, retail store,  or bank branch.  The location is intricately tied to a business’s identity in the mind of the consumer.  It may not be easy to just pick up and move.

The reality is that if the tenant does not undertake the kinds of due diligence implemented for a property purchase, he could “lose” the property in many of the same ways as in a purchase — i.e., he could lose the out-of-pocket costs associated with the activities noted above and have the inconvenience and loss to reputation by relocating to a second location.

The types of risk potentially borne by a tenant that due diligence could avoid

Indeed, in certain circumstances the tenant could be obligated to pay rent throughout the lease term, but the property cannot be occupied for its intended purpose.  (Consider a situation where the property cannot be occupied but where the landlord does not appear technically in default of his obligations under the lease.)

  • When signing a significant lease for property, a title examination, possibly a survey, and assuring lender buy-in of the lease can be absolutely critical.
  • If, for example, the landlord has a mortgage against the property, and the mortgage is in default, that lender legally can extinguish a later–signed lease concurrent with the foreclosure.
    • To avoid this risk, one asks a landlord to execute a subordination, non–disturbance and attornment agreement agreeing that so long as tenant makes prompt and full payment of rent (to the landlord or– when in default of the mortgage — to the lender), the lender or a successor buyer will honor the lease.
    • A tenant’s policy of title insurance can be issued, transferring that risk to a title insurer.
  • If the property does not comply with the regulatory requirements, zoning for example, of the jurisdiction in which the property is located, the tenant could be required to make extensive property modifications or to move.
  • If the property has environmental problems, the cost of compliance — in an unlimited manner — could be transferred to the tenant.
  • If the property has structural problems or the HVAC system is old and inoperable, depending on the lease language (shifting repairs and replacement of the HVAC to the tenant), the burden of fixing the problem could fall to the tenant.

Conclusion

Many times tenants will assume these risks in smaller leases.  Negotiating with the landlord’s lender and conducting full-scale inspections and other due diligence may just not be practical.

But a tenant in a commercial setting should carefully consider the risk-benefit to foregoing certain due diligence steps to prudently protect their investment in their new premises.

Call Isaac Heintz (513-943-6654) or Eli Krafte-Jacobs (513-797-2853) to address your commercial leasing questions.

 

Ohio Real Estate Law: Constructive and Resulting Trusts: Little-Known Exceptions to a Well-Known Rule

Author By Casey A. JonesPosted on

As first-year law students and many even outside of the legal community know, the “statute of frauds,” codified in Ohio R.C. 1335.04, requires that any interest in land be evidenced by a writing.

Principle of Part Performance

But this general principle is not without exception. One of the more commonly referenced exceptions is part performance. Sites v. Keller, 6 Ohio St. 483, 489-490 (1834) (“Whenever an agreement has been partly performed, and the terms of it are satisfactorily found, it will be enforced notwithstanding the statute.”); Shahan v. Swan, 48 Ohio St. 25, 37, 26 N.E. 222 (1891) (“[I]f the acts of part performance clearly refer to some contract in relation to the subject matter in dispute; its terms may then be established by parol.”).

Other exceptions

However, lesser-known exceptions exist, as well, and are frequently neglected in the statute of frauds discussion. This has resulted in a misunderstanding among many as to the scope of the statute of frauds and when it precludes a claimed interest in land. Specifically, there are two types of equitable trusts that effectively circumvent the harsh consequences of requiring strict compliance with the statute of frauds: a constructive trust and a resulting trust.

Ohio Constructive Trust

“A constructive trust arises by operation of law against one who through any form of unconscionable conduct holds legal title to property where equity and good conscience demands that he should not hold such title.” Dixon v. Smith, 119 Ohio App.3d 308, 319, 695 N.E.2d 284 (3d Dist. 1997). Where one “who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means . . . either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy,” equity will create a constructive trust. Ferguson v. Owens, 9 Ohio St.3d 223, 225, 459 N.E.2d 1293 (1984).

Additionally, at least one Ohio court has suggested that, “[d]espite the above cited language . . . a constructive trust may exist even where there is no evidence that the title to the property was obtained by improper means.” McGrew v. Popham, 5th Dist. No. 05 CA 129, 2007-Ohio-428. ¶¶ 17-19, citing Groza-Vance v. Vance, 162 Ohio App. 3d 510, 520 (10th Dist. 2005). The creation of a constructive trust is premised upon the unjust enrichment that would result if the person holding legal title to the property were allowed to retain it. Ferguson, at 226.

Ohio Resulting Trust

The Ohio Supreme Court has also recognized “a resulting trust as one that the court of equity declares to exist where the legal estate in property is transferred or acquired by one under circumstances indicating that the beneficial interest is not intended to be enjoyed by the holder of the legal title.” Univ. Hosps. of Cleveland, Inc. v. Lynch, 96 Ohio St.3d 118, 772 N.E.2d 105, 2002-Ohio-3748, at ¶ 56, citing First Natl. Bank of Cincinnati v. Tenney, 165 Ohio St. 513, 515, 138 N.E.2d 15 (1956). This concept is easily understood in the purchase-money context – “where property is transferred to one person but another pays the purchase price, the law presumes a resulting trust exists in favor of the person paying for the property.” Hollon v. Abner, 1st Dist. No. C960182, 1997 Ohio App. LEXIS 3814, at *5 (Aug. 29, 1997); Perich-Varie v. Varie, 11th Dist. No. 98-T-0029, 1999 Ohio App. LEXIS 3990, at *7-*8 (Aug. 27, 1999).

For example, in the Perich-Varie case, the court found that where an individual had been making the mortgage payments on property legally held in his former in-laws’ names, he had a full ownership interest in the property. This was true even though the in-laws argued that the mortgage payments were merely “rent” and even though he had only paid $12,000 of the $33,000 mortgage on the property. Perich-Varie, at * 4-5, * 10-11. To eliminate any inequity (after all, that’s what a resulting trust is all about), the Eleventh District required the lower court to order that the mortgage first be satisfied so that the in-laws were not obligated under a mortgage on a property in which they had no interest. Id., at * 14.

Conclusion

As you can see, constructive and resulting trusts represent some pretty significant departures from the rigid statute of frauds in the name of “equity.”  While a lot of confusion, disagreement, and, ultimately, litigation can be avoided by putting matters involving real property in writing, those who find themselves in a situation where their interest has not been reduced to writing are not necessarily without recourse if one of these equitable remedies applies.

 

When Limited Liability Isn’t So “Limited”

Author By Casey A. JonesPosted on
Casey Taylor write on Ohio commercial real estate brokerage liens
Casey Taylor, attorney

Our firm has previously written on the creative ways one can shield his or her personal assets through the corporate or limited liability structure. As noted in that entry (Link Here), “Ohio courts and courts throughout the nation have been pretty vigilant in protecting the corporate veil of owners of corporations and limited liability companies.”  However, this general principle is not without a couple of narrowly drawn exceptions, explored below.

Formation of LLCs

The Finney Law Firm deals regularly with clients and other parties that are organized as limited liability companies (“LLCs”) or corporations.  After all, these entities are fairly simple to create – one must simply fill out an online form or two, submit a relatively small fee to the Secretary of State, and they are then able to transact business without fear of personal liability, right? Maybe not.

The powerful “corporate veil” protection of an LLC

Generally, an LLC member cannot be held personally liable for the torts or contractual obligations of the LLC solely by virtue of his or her membership in the LLC. City of Lakewood v. Ramirez, 2014-Ohio-1075, ¶ 11 (8th Dist. 2014). Thus, if an LLC defaults on its obligations under a contract, an adverse party cannot obtain judgment against the LLC members’ or managers’ personal assets.  It is for this reason, along with its ease of formation, that the LLC structure is so desirable to many. And, most of the time, it succeeds in its purpose of precluding judgment against the members’ personal assets.

Narrow exceptions

However, there are two sets of circumstances under which the limited liability structure does not shield members from personal liability.

1.   Piercing the corporate veil

The first is where the court deems it proper to “pierce the corporate veil,” thereby removing that protection of limited liability.

[I]n order to pierce the corporate veil and impose personal liability upon [members or managers], the person seeking to pierce the corporate veil must show that: (1) those to be held liable hold such complete control over the corporation that the corporation has no separate mind, will, or existence of its own; (2) those to be held liable exercise control over the corporation in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.

Stewart v. R.A. Eberts Co., 2009-Ohio-4418, ¶ 16 (4th Dist. 2009), citing Belvedere Condominium Unit Owners’ Ass’n v. R.E. Roark Cos., 67 Ohio St. 3d 274, ¶ 3 of the syllabus, 617 N.E.2d 1075 (1993).  The idea behind piercing the corporate veil is that there is so little separation between the individual and the LLC, that they can almost be considered “alter-egos” such that it is not unreasonable to hold the member or manager of the LLC personally liable for the debts, obligations, and/or liabilities of the LLC.

2.  Member’s own acts, ommisions or fraud

The second instance where a member can be held personally liable notwithstanding the limited liability structure is where the members’ own acts or omissions constitute fraud. R.C. 1705.48; See also Deitrick v. Am. Mortg. Solutions, Inc., 2007-Ohio-839, ¶ 19 (10th Dist. 2007) (finding that a “corporate officer can be individually liable in tort if the promises contained in the contract are fraudulent” and “even if he commits the fraud while in the course of his corporate duties”); Stewart, at ¶ 30 (“[N]either the corporate shield, nor a shield of limited liability insulates a wrongdoer from liability for his or her own tortious acts.”). Additionally, this second instance is not contingent upon the first (i.e., a litigant who seeks to hold an LLC member personally liable for the member’s own fraud need not first pierce the corporate veil in order to do so).  Yo-Can, Inc. v. Yogurt Exch., 149 Ohio App. 3d 513, 527 (7th Dist. 2002) (“[P]laintiffs need not pierce the corporate veil to hold individuals liable who allegedly personally commit fraud.”).

Conclusion

Thus, while the LLC or corporate structure are very successful at providing owners/members with a great deal of protection the overwhelming majority of the time, one shouldn’t make the mistake of thinking his or her personal assets are entirely immune regardless of the circumstances.

1 … 10 11 12 13 14 … 22