Ohio Practical Business Law : Columbus Ohio Business Lawyer & Attorney : Teri Rasmussen : Plunkett Cooney Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

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.

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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:

• The Content of Veil Piercing Complaints
• Who Gets Sued in Veil Piercing Cases?
• What Does Veil Piercing Success Mean Anyway?
• What Factors Correlate with Veil Piercing Success?

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.   

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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 
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• 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. 
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• 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,  
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• 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.
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• 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.
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• 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. 

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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.

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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.

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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.   

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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:

• Wallace's Motion to Vacate
• Bank's Responsive Memo in Opposition
• Wallace's Reply
• Bank's Sur-reply

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. 

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Over the last few months, Ohio appellate courts have handed down several interesting decisions regarding cognovit notes and judgments -- including one currently on appeal in the Sixth Circuit, Huntington National Bank v. Wallace, on which I'll be doing a separate post.  So for the next few posts, I'll be focusing on some of these  

For those wanting just the practice pointers coming out of the cases discussed in this post:

• It's OK to continue to have your bank's logo on the front page of a cognovit note, at least in the Tenth Appellate District here in Central Ohio
• Best practice is to box and bold the cognovit warning in PRECISELY the same language as that found in the statute and NOT ADD ANYTHING!  If you feel compelled to include additional language, at least do it in addition to and in a smaller type face than the warning.
• Don't worry about having to take cogs in commercial dockets/business courts if available.
• Make sure you can show where a cognovit note is executed and get a good address at least at the time of execution.  

Of Logos and Extra Language.  If you've always wondered exactly how magic the look and language of the cogonovit wanring on promissory notes really is,  read Huntington National Bank v. Burda, 2009-Ohio-1752 (10th App. Dist April 14, 2009).    (Hat tip to a Creditor Rights and Bankruptpcy E-Alert sent out by another firm in town for biring the case to my attention)  As readers of my previous posts on cognovit notes know, valid cognovit notes require the appearance of certain language "in such type size or distinctive marking that it appears more clearly and conspicuously than anything else on the document"  Ohio Rev. Code 2323.13

Many banks like to put their logo at the top of the first page of their promissory notes. And because it's generally larger than any text, I suppose it's not especially surprising that someone would eventually try to allege that the presence of such a logo rendered a cognovit note unenforceable as a cognovit note.  That's exactly what happened in Huntington National Bank v. Burda.  In addition, the Court addressed the issue of whether the addition of additional language to the cognovit WARNING block rendered it invalid. 

The cognovit warning  in question looked something like this:

NOTICE: FOR THIS NOTICE “YOU” MEANS THE BORROWER AND “CREDITOR” AND “HIS” MEANS LENDER.

 

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.   

 In rejecting the borrower's claims that the warning was insufficient, the Court of Appeals noted that "[i]n creating a warning that appears more clearly and conspicuously than anything else, a drafter of a cognovit note may employ multiple methods - capitalization, italicayion, underlining, bolding, framing the warning with  borders or a distinctive type face" and that "a drafter need not go so far as to use 'flashing neon light.'"  In this particular case, the court determined that "in combination, the use of bolding, capitalization, type size, and a black box make the warning the most clear and conspicuous part of the promissory notes."

With respect to the argument that the prominence of the Sky Bank logo made the warning invalid, the court concluded "the warning is more clear and conspicuous, particularly because it  - unlike the words "Sky Banl" -- is enclosed in a box with thick black margins,"

As far as the additional sentence in the warning, because it was set off from the statutory warning, it did not vitiate the warning.  The Court of Appeals did note that courts of appeal in Ohio's Fifth and Seventh Appellate Districts had vacated cognovit judgments where note did not include a "verbatum recitation of the statutory warning", the Court held that this situation was more like that faced by Ohio's Eighth Appellate District in Olmsted Lumber Co. v. Palmetto Homes, Inc., Case No. 41802 (June 12, 1980) with the language being "mere surplusage"  As the Court of Appeals saw it:

Although included in the black box with the warning, the additional sentence is separated from the warning by a space and the use of smaller, regular (not bold) type.  Because the additional sentneceis not incorporated into the warning, it does not modify the warning,

Role of Commercial Dockets/Business Courts.  Whenever a new wrinkle is added, there's always a transition period in which the outside limits are tested.  In the recent case of 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), the Court was asked to decide whether a cognovit judgment requires that the case be first assigned to the new commercial docket being tried in several parts of the State of Ohio and that judgment only be rendered by a commetical docket judge rather than than the usual duty judge procedure.

As I've explained the process before, the Court of Appeals noted:

As is customary with cognovit note cases, the judgment [in this case] was entered by another judge of this court serving that week as the court's duty judge.  The duty-judge responsibility rotates week-by-week through all judges in the court.  For many years, cognovit note cases have routinely been routed to the duty judge serving when the case is filed.

Apparently, challenging a cognovit judgment on the basis it should have been entered by a commerical docket judge has caught the fancy of other defendants as well:  

Since it was created in January 2009, arguments have been raised in several cases that the assignment of cases to the commercial docket is a jurisdictional requirement.  This, it is argued, rulings may only be made in cases otherwise meeting the criteria for the commercial docket by one of the two judges in Franklin County specifically assigned to the docket by nthe Chief Justice of the Supreme Court of Ohio. 

No doubt gladdening the hearts of creditors' attorneys such as myself throughout the state, the Court rejected this argument, saying

While the judgment challenged in the case was not rendered by a commercial docket judge, that fact has no jurisdictional significance.  The temporary rules of superintendence do not demand that commercial cases only be decided by a commercial judge, failing which they are void or voidable.  Instead, those rules are concerned with case-assignment and case-management procedures.  They do not -- indeed could not -- alter the jurisdiction of the court.

Location, Location, Location - Jursdiction for a Cog Judgment.  We all know that cognovits are disfavored so it should really not come as not too much of a surprise that it really does matter where the promissory note was executed and where the makers reside/have their principal office when the judgment is taken. 

In Pheils v. Glass City Sales, LLC, 2009-Ohio-4623 (3rd App. Dist.). the plaintiff attempted to take a cognovit judgment against the defendant company in Seneca County, alleging that the company's ownership of real property in that county was sufficient to give the court jurisdiction.  The Court of Appeals disagreed, saying "The fact that Glass City Sales purchased the property [in Seneca County] and its name was placed on the deed using the property's address does not, without more, prove that it conducted business from the site."  Apparenlty, there was also an affidavit by one of the individual defendants to the effect that the defendant company never did business in Seenca County.

There are several things I don't like about this case. The defendant company's  Articles of Organization were apparently incomplete in that they did not include an address for the LLC.  While i suppose the creditor should have done a better job of getting an address at the time the note was executed, it doesn't seem unreasonable to me that the ownership of property in the county suggests some level of business being conducted.  It also seems like it would have been a whole lot easier just to depose the individual defendants as to where the defendant company's place of business was.

Instead what we wind up with is a case underscoring the importance of having a cognovit note at least stating the county in which it is being executed to eliminate this sort of problem.

Copies or Originals?  Finally, while these are not exactly recent decisions, I did discover a couple of decisions indicating that, contrary to what I've always taken as an article of faith, at least some courts in Ohio may be willing to allow a cognovit judgment to be taken without the necessity of producing the original promissory note.  Ohio Courts of Appeal for the Sixth and Seventh District Courts of Appeal have ruled that producing merely a copy of the note containing the cognovit provisions is enough.  Masters Tuxedo-Charleston, Inc. v. Krainock, 2002-Ohio-5235 (7th App. Dist.); Fogg v. Frieser, 562 N.E.2d 937, 55 Ohio App.3d 139 (6th App. Dist. 1988).

It's true that Ohio Rev. Code section 2323.13 states "[t]he original or a copy of the warrant shall be filed with the clerk."  So, technically I suppose these courts are correct.  However, practical custom still seems to be that most judges most places still like to see the originals.

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In recent years we have all become far more conscious of the importance of our personal identification information and the undesirable consequences that can result if the information falls into the wrong hands.  Now Ohio courts will join many other judicial and other governmental agencies in taking steps to protect this sort of information. 

Effective July 1, 2009, the Ohi Supreme Court issued Public Access Rules in the form of new Rules of Superintendance 44-47 requiring the redaction of "personal identifiers" in pleadings, orders, and judicial administrative records.  The new rules are applicable to any court filing in any court, including even Small Claims Court.     

"Personal identifiers" are defined in Sup, R. 44 as

social security numbers, except tor the last four digits, financial account numbers, including but not limited to debit card, charge card, and credit card numbers, employer and employee identification numbers, and a juvenile's initials or a generic abbreviation such as "CV" for "child victim"  

The Ohio Supreme Court has a link on the right hand side of its home page to a subpage on its website with a great deal of information about the new rules.  In addition to the text of the rules, there is:

• Summary of Rules
• Frequently Asked Questions - this is very helpful
• a very short executive summary type Important Points to Understand About the New Access Rules 
• a very nice PowerPoint presentation explaining the new Public Access Rules
• Comments by the Chief Justice
• Sample Confidential Personal Identifiers forms which must be completed separately when this sort of information is important to the disposition of the case (Sup. R. 45(D))

The various Common Pleas Courts, Municipal Courts, and Courts of Appeal are left to their own devices as far as developing implementation procedures for these rules.  The Rules of Superintendence also contain some procedures those wishing to obtain access to redacted infromation can follow.  No specific penalties for violation are included in the rules. 

While the intent of the rule was probably primarily focused on protecting the privacy of individuals, the language of the new Public Access Rules also encompass businesses and other commercial ventures.  In this respect, they are more restrictive than those that have already been in force in Bankruptcy Court  which pertain only to personal information of individuals. 

In addition, it is important to remember that the rule applies not only to the text in pleadings and order, but also to EXHIBITS that might be attached.  So, for example, if a promissory note being sued on has a "note number" or "obligor number", or a purchase order has an "account number", that information should be redacted to be safe. 

>>>>>>>

And on a personal note, today was a glorious day to be a University of Michigan graduate in Columbus, Ohio: Michigan beats Notre Dame in a tight football game in the Big House while Ohio State loses at home to USC.  It'll be a long football season this year for UM, but at leasr for a few days I can be happy. 

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So here I am over the Memorial Day weekend, having already played a super round of golf, looking over the course materials for the Business Law I class I  am teaching undergraduates at Capital University's School of Management later this Summer.  And I realize that in addition to Contracts. Property, and Torts -- which I do sorta know, or at least remember -- I'm probably going to need to teach them a little about the concepts of principal and agent.  Which, if recollection serves me correctly, we spent all of about 15 minutes on when I was in law school.

One of the pitfalls of giving yourself a break from your blog (and all that Chrysler /GM bankruptcy nonsense) over a holiday weekend is that you're not exactly sure what to write about next.  So guess what?  Today we're going to explore the law of agency.

We've all heard about big-time "agents" representing superstar athletes in one sport or another with respect to negotiating their multi-million dollar contracts.  But as it turns out, ordinary mortals in the business world are constantly dealing with agency relationships of one kind or another as well.

Agency is primarily a contractual relationship in which the agent has agreed to represent the interests of another person -- known as the principal -- with respect to third parties.  It does not require, although it often does include, compensation of the agent for his efforts.  Agents owe a fiduciary duty to their principal  to exercise ordinary care and keep the principal in the loop on important issues. 

Officers and directors are agents of a corporation.  Professionals such as attorneys and CPAs  typically act as agents in providing their services to clients.  In addition, particular empoyees and even independent contractors can be or become agents.  Implied authority allows these individuals to undertake particular actions needed to carry out their dutes such as signing a particular document.

In addition, however, there can also be such a thing as implied agency.  This typically arises in connection with the conduct of, or relationship between, the two parties deemed to be principal and agent.  Here what is important is how third parties are reasonably likely to view the relationship.

With respect to contracts, a principal will be liable for anything to which the agent agreed so long as it is within the agent's actual or apparent authority.  In addition, if the principal accepts the benefits of the agreement the agent made, he or she will be said to have 'ratified" the contract.  On the flip side, the agent will not be held liable on these agreements as long as he acted within the scope of his authority. The key for the princiipal is to make clear where the authority of the agent ends, esepcially if it is not immediately obvious.

When it comes to crimes or harm cause by negligent acts (called "torts" in the law biz), the agent is always liable for his own personal wrongdoing.  However, in many instances a principal may also find themselves held liable for the actions of the agent.  Perhaps most familar is the "vicarious liability" that employers have for activities of their employees while acting in the scope of their employment; this might include such commonplace things as a car accident injuring another person not employed by the company.  In addition the principal can be held directly liable, even when there is no employer-employee relationship, if it did not exercise proper care iin supervising the agent.

To me, the concepts of principal and agent, and the respective levels of liability we place on eachseem relatively intutive.  If the other side knows or should know a person is acting as an agent for someone else, then it makes sense to only hold the principal liable for any resulting contract. Of course when that part gets a little sticky to determine, the cases get a lot harder.  So this may be one of those easy to lear, hard to master concepts.

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Recently the Ohio Supreme Court issued yet another opinion regarding "piercing the corporate veil".  According to the Ohio Supreme Court's syllabus in Minno v. Pro-Far, Inc., 2009-Ohio-1247:

A corporation's veil may not be pierced in order to hold a second corporation liable for the corporate misdeeds of the first when the two corporations have common individual shareholders but neither corporation has any ownership in the other.

Well, duh.  As long-time followers of this blog know, I have something of a fascination with corporate veil piercing cases so this post on the Ohio Supreme Court's latest puttering with this legal concept should come as no surprise.

When last we considered the issue, the Ohio Supreme Court had just muddied the waters of the standard for determing if veil piercing was appropriate in a particular case by ruling in Dombroski v. Wellpoint, Inc., 2008-Ohio-4827, that the second prong of the famous test enunciated in  Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Co., Inc. (1993), 67 Ohio St.3d 274, 617 N.E.2d 1075 included not just illegal acts, but also "similarly unlawful" acts, but did not encompass merely unjust or inequitable acts.  The Court found that insurance bad faith was not sufficent.  For more detailed analysis of Dombroski, visit my previous post "Potato, Potahto, Illegal, Unllawful - Dombroski and New Rules for Piercing the Corporate Veil".

While Dombroski involved a parent-subsidiary corporate relationship (and refused to allow veil piercing), Minno involved two small privately held companies owned by the same set of shareholders.  When Minno fell 19 feet while at a work site, he sued his employer See-Ann for failing to provide a safe working environment.  He also sued Pro-Fab, Inc., an affilated corporation, owned by the same shareholders as See-Ann, alleging that it was in control of the work site and was the alter ego of See-Ann.

Although the two companies had different incorporation dates, they shared common owners and officers, had identical business addresses, and engaged in similar lines of work.  See-Ann, Minno's employer, did not have any general liability insurance; Pro-Fab, Inc. did.  The trial court nevertheless granted summary judgment in favor of Pro-Fab, refusing to permit veil piercing.  The Court of Appeals reversed.   

The Supreme Court began by reciting the Belvedere test, as modified (?) by Dombroski.  It then upheld the trial court's determination that veil piercing was not appropriate, saying:

In contrast to a shareholder's ownership of a corporation or a parent corporation's ownership of another corporation, the common shareholder ownership of sister corporations does not provide one sister corporation the inherent ability to exercise control over the other.  Any wrongful act committed by one sister corporation might have been instigated by the corporation's owners, but it could not have been instigated by the corporation's sister....

Despite the element of common shareholder identity, sister corporations are separate corporations and are unable to exercise control over each other in the manner that a controlling shareholder can.  This lack of ability of one corporation to control the conduct of its sister corporation precludes application of the piercing-the-corporate-veil doctrine.  

I am pleased to see a trend by the Ohio Supreme Court of respecting well established principles of corporate law concerning the relationship between, and separateness of, affiliated companies.  At the same time, however, veil piercing is supposed to be an equitable remedy and if ever there was a case justifying treating two corporations as one, this might have been it.  Corporations can only act through their officers, directors and shareholders, and if those are few and identical, it stands to reason that the true decisionmakers really are the same. 

it is also interesting that there is no discussion about whether bank accounts and finances were comingled, something i've always thought was key to a determination of whether to permit veil piercing.  Nor is their any discussion of the extent to which the two companies followed corporate governance rules by hainv shareholder and director meetings, something else that has been important in prior veil piercing decisions. 

Does this signal a more conservative formalistic approach to veil piercing cases?  Maybe.  We'll have to wait and see.

The decision is relatively short, but for those with a very short atttention span, there is the usual excellent synopisis of the case prepared by the Ohio Supreme Court Office of Public Information.

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So now that Ohio has specialized business courts in the form of pilot "commercial dockets", how does it work?  For a concise overview of the impetus for business courts/commercial dockets and how they are being implemented in Ohio, view this unattributed PowerPoint presentation to the Cleveland Bar Association. 

     Q. 1.  What sort of cases will be handled?

In general, cases must involve issues between business entities (can include sole proprietorships, common law general partnerships, or joint ventures) or between individuals involved in a business dispute of some kind. NO CONSUMER OR PERSONAL DISPUTES.    Basically, cases must fall into, and focus primarily on, one of the following categories:

• Corporate Governance - formation, governance, dissolution, or liquidation of a business entity.  Could include receiverships.

• Shareholder/Ownership Disputes - rights or pb;ligations between or among the owners, shareholders, partners, or members of a business entity or between them and the business entity.

• Trade Secrets, Confidentiality, Non-Competes and Similar Employment Related Agreements - Must be between business entity and officer or owner.  Involves business related aspects only.  NO DISCRIMINATION OR LABOR UNION CASES.

• D & O Liability - Rights, obligations, liability, or indemnity of an officer, director, manager, partner, etc. of a business entity owed to or from that business entity.

• Miscellaneous Business Disputes - Disputes between two or more business entites or individuals regarding their business or investment activities and relating to contracts, transactions or relationships between or among them.  Commercial foreclosures, receiverships, and collection cases would qualify.  NO DISCRIMINATION, WAGE, WORKERS COMP, LABOR UNiON, or PERSONAL INJURY CASES.

    Q.  2.  What courts are involved in Ohio?

Several months ago I posted about the origins and scope of business courts and the coming pilot project in Ohio.  At that time, only Hamilton County (think Cincinnati) actually had a pilot program, which had only begun in September 2008, up and running.  Now, Franklin County (which includes Columbus and Central Ohio where I live and practice law)l, Cuyahoga County (Cleveland area), and Lucas County (Toledo) also have pilot programs, all of which started earlier this year.  Montgomery County (Dayton) is reportedly also a possiblity, but apparently has not yet taken formal steps to adopt a pilot program.  No other courts in Ohio are involved. 

According to the Ohio Supreme Court website, the following Common Pleas Judges are overseeing the pilot projects in their courts:

Cuyahoga County Court of Common Pleas:

• Judge Richard McMonagle
• Judge John O'Donnell

Franklin County Court of Common Pleas (provides this short overview of its commercial docket program)

• Judge John Bessey
• Judge Richard Frye

Hamilton County Court of Common Pleas

• Judge Steven Martin
• Judge Beth Myers

Lucas County Court of Common Pleas

• Judge Gary Cook
• Judge Gene Zmuda

     Q.  3.  Are there specific rules concerning commerical dockets?

Yes and No.  the Ohio Supreme Court has added Temporary Rules 1.01 to 1.11  to the Rules of Superintendence for the Courts of Ohio to remain in effect until July 1, 2012.  In addition, the Lucas County Court of Common Pleas has adopted Local Rule 5.08 and Franklin County Court of Common Pleas has adopted Local Rule 94.  Cuyahoga County and Hamilton County do not appear to have adopted any specific local rule.  The Ohio Supreme Court has also posted a sample Pretrial Order on its website.   Except as limited by these rules (mostly procedural and adminstrative provisions), all other rules of evidence, civil procedure, and pleading remain the same as with any other case filed in an Ohio state court.

     Q. 4.  How does a case get assigned to the "commercial docket"?

Cases are originally assigned to judges in the same manner as they have been.  There are THREE possible ways for a case to find its way to the commercial docket:

• The Plaintiff files a Motion for Transfer of the case at the time the Complaint is filed which is hopefully granted.  Ruling on Motion is supposed to be made within TWO days.   That ruling can be appealed to the Court's Administrative Judge within three days and the Administrative J8udge must rule on any appeal within TWO DAYS.  The decision of the Administrative Judge is FINAl and may not be appealed. 

• The Defendant files a Motion for Transfer  whenever it files its initial pleadingwhich is hopefully granted.  Ruling on Motion is supposed to be made within TWO days.  That ruling can be appealed to the Court's Administrative Judge within three days and the Administrative Judge must rule on any appeal within TWO DAYS.  The decision of the Administrative Judge is FINAL and may not be appealed. 

• Judge to whom the case is originally assigned sua sponte transfers the case.

     Q. 5.  What is the benefit of having a case assigned to a commercial docket?

It is hoped that funneling these sorts of cases to a limited number of judges will result in more knowledgeable rulings.  It is also contemplated that commercial docket judges will begin posting their decisions to a public website to promote consistency in decisions.  In addition, all motions in commercial docket cases are supposed to be ruled upon within sixty (60) days after being filed.  Decisions are required to be rendered within ninety (90) days after the c0nclusion of a bench trial.

Special masters can also be appointed with the consent of both parties, although the parties may be asked to pay for this.  Special masters would have the authority to conduct investigations, hold proceedings or enforce orders.

     Q.  6.  How long will the pilot program last?

Currently, it is contemplated that the pilot programs will run until June 30, 2012.  The Ohio Supreme Court has asked commercial docket judges to complete a supplement for commercial docket cases to gather certain statistical information. 

>>>>   It's not clear yet  whether the commercial docket concept is catching on or for that matter whether either lawyers or their clients are even aware of the option.   As with all new things it will take some time to be accepted and longer to evaluate.

>>>>  For many lawyers, myself include, it's hard to know whether commercial dockets can live up to their billing and thus hard to take that first step to make use of them. 

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I'm enough of a geek (well, actually, I'm probably mostly always a geek when any sentence starts out this way) to think that it's always somehow at least a little bit "cool" when real life "LAW" intersects - in a nonthreatening way, mind you - with my everyday life.  Which is WHY I simply HAD to write this blog post about the recent change in name of one of my favorite Dublin, Ohio (and now that I know about the larger Worthington location, even more favorite) Central Ohio restaurants.

My Jason's Restaurant & Bar began life in a smallish location on Dublin's main drag that had previously been home to a Bruegger's Bagels or some such enterprise.  It quickly became one of my favorites as a lawyer working in Dublin beause of its eclectic menu featuring both Asian cuisines and more traditional American fare, terrific decor, and reasonable prices.  Parking was sometimes an issue, but hey you can't have everything and the Worthington location may solve some of those issues. 

Unfortunately for Jason's, a competitor was eyeing the territory and decided to move in.  Jason's Deli has a federal trademark and thus was able to force Jason's Restaurant & Bar to change its name.  Click here for the local newspaper account of the predicament the owner of my Jason's found himself in. 

GUEST POST BY CHERYL SCOTNEY

So how can this be?  How can an already established local eatery be forced to give up the name it has worked hard to establish in the community to an outsider?  For answers, I went to my friend Cheryl Scotney, a Registered Patent Attorney with Standley Law Group LLP.  At my request, she agreed to pen the following guest post addressing the general issue this sort of thing raises  - although she cautions that she can only surmise the actual sequence of events and actions taken (or not taken) in the particular Jason's incident.

 >>>>>>>>>> and now.....

                                                  A GUEST POST BY CHERYL SCOTNEY >>>>>>>>>>>>>>>>>>>   

The story is an old one…  a central Ohio restaurant opens with its chosen name but the name is not protected by trademark registration.  Some years later, after the restaurant is successful and has acquired goodwill in the restaurant name, it is required to change its name.  Another restaurant is entering the area with a confusingly similar name.  The new restaurant entering the market has obtained federal trademark rights in its name -- many years before the central Ohio restaurant opened.  The new restaurant demands a name change by the existing central Ohio restaurant.

This scenario can happen with restaurants or any other new business venture. That is why it is extremely important for small business owners to adequately protect their new business name. 

In some recent cases, the small business owner did not perform a federal trademark search or file for federal trademark protection before opening their business.  The small business owner may be able to go on for several years with no problem.  However, a trademark issue may then arise when the small business owner becomes successful and is thrust into the public eye and/or when a new business with a pre-existing federal trademark registration for a confusingly similar trademark comes to town.  

The small business owner (who may no longer be all that small at this point) may be required to change its name or pay legal fees to fight for their business name.  A defense to any trademark infringement claim may be that the small business owner was using the mark in Ohio prior to the federally registered entity coming to town.  Unfortunately, the defense would not be successful as federal trademark rights that were secured prior to the opening of the Ohio restaurant supersede any trademark rights acquired by the Ohio restaurant.  The cost of changing signs, menus, advertising, uniforms and other printed and online advertising is significant.  But the most costly is the loss of goodwill that is associated with the business name. 

Several recent Ohio cases point to the fact that it is not a good idea to pick your personal name as the trademark or service mark for your company.  This only becomes an issue when your small business becomes successful and another company acquires your company through a sale.  The sale will most likely include assignment of all trademarks associated with the company.  The seller will then be in the position that he/she can no longer do business using his/her own name. 

It is also important to file a trademark application in the correct party’s name.  Whatever entity is going to be using the mark with the sale of the goods or services is the correct entity to list as applicant.  If a person is in the process of filing paperwork to incorporate or set up an LLC, then filing a trademark application should wait until that business paperwork is filed and accepted.  This is done to avoid issues of fraud and liability. 

Securing Ohio trademark or service mark rights in your company’s name may be of little value in today’s advertising environment.  A federal trademark registration is the best means of protection.  Unbeknownst to most, an Ohio trademark/service mark registration application requires an applicant to verify that “no other person has a registration of the same or of a confusingly similar trade mark/service mark in the United States Patent Office for the same or similar goods” (Line 10) and that the applicant is the “owner of a concurrent registration in the United States Patent Office of this trade mark/service mark covering an area including this State” (Line 11).    Verification of these statements implies that a comprehensive federal trademark search was performed prior to filing the Ohio trademark/service mark application.  

A typical comprehensive trademark search performed by a competent trademark attorney costs about $300/mark or if searched through an outside search service, such as CorSearch, the cost is about $600/mark.   A trademark search should include a federal search on the exact mark, alternate spellings or similar marks, a search of all 50 states trademark and service mark databases, a search of domain names and a common law trademark search (usually performed on the Internet or in business listing databases).

     Cheryl S. Scotney is a Registered Patent Attorney at Standley Law Group LLP located in Dublin, Ohio.  She  has a degree in Chemistry and focuses her practice on  the preparation and prosecution of domestic and foreign patent and trademark registration applications, in the filing of opposition and cancellation trademark proceedings, and in the preparation and prosecution of copyright registration applications.  She can be reached at cscotney@standleyllp.com or by phone at (614) 792-5555.

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So how do you find out what a franchisee actually has to DO?   In my last post, I wrote about the parts of the new Franchise Disclosure Document (FDD) that focus on describing the franchise and the business opportunity it represents.  Now I will focus on the portions of the FDD which delineate what will be expected and required of the would-be franchisee, both financially and legally.  As before, I include links to the examples of each Item contained in the Franchise Rule Compliance Guide issued in May 2008 by the Federal Trade Commission.  For a complete set of the sample pages contained in the Compliance Guide, click here. 

Financial Investment Required by Prospective Franchisee; Financing

These sections relate to the amount of $$$ someone getting into the franchise business relationship with the franchisor will need to put up either initially or while the franchise arrangement continues.  Although this might seem like a fairly straightforward set of disclosures, in reality, there is often a dizzying array of fees and other payments required (e.g. advertising allowances, renewal fees, royalties, training charges, transfer fees, etc.) and elaborate calculation formulas.  And not everyone pays the same amount to get into a franchise system.  Whether full and proper disclosure was made of all fees is also often a significant area of dispute in franchise litigation. 

Items 5 and 6 relate to fees paid by the franchisee to the franchisor, but do not include payments to third parties such as utlities payments for telephone and electricity.  Item 7 covers expenses involved in getting a franchise outlet off the ground; it includes both the payments detailed in Item 5, as well other outside expenses such as real estate acquisition or lease expense, equipment purchase or lease, signage, etc. and explains the likely manner payment will be required, i.e. lump sum or as incrurred.

The terms and conditions of any financing franchisors make available, directly or indirectly, to prosective franchisees must also be disclosed in Item 10.  

• Item 5 - Initial Fees [Paid to Franchisor]
• Item 6 - Other Fees [Paid on Ongoing Basis to Franchisor]
• Item 7 - Estimated Initial Investment [to begin franchise operations]
• Item 10 - Financing [available from or arranged by franchisor for franchisee]  

Basic Contractual Obligations of the Parties

If one is still interested in becoming part of a franchise after learning about the background of the franchisor and its key people, digesting the information provided regarding historical and anticipated financial performance, and  understanding the financial commitment required, it's time to become familiar with the contractual obligations involved in the franchise relationship.  Item 9 and Item 11 of the FDD contain the basic responsibilities franchisee and franchisor owe to each other.  Other provisions address the geographic area which will belong to the franchisee, as well as the extent to which personal involvement in the day-to-day operation of the franchise outlet will be required of a franchisee, and the type and nature of any ancillary agreements required in connection with becoming a franchisee.  Other procedural asects such as triggers for termination, options for renewal, transfer rules and dispute resolution procedures must also be disclosed.  Item 23 specifies the form of acknowledgement the franchisor must get from the prospective franchisee that the FDD was timely and properly provided to the prospective franchisee.

• Item 9 - Franchisee's Obligations
• Item 11 - Franchisor's Assistance, Advertising, Computer Systems
• Item 12 - Territory
• Item 15 - Obligation to Participate in the Actual Operation of the Franchise Business
• Item 17 - Renewal, Termination, Transfer, and Dispute Resolution
• Item 22 - Contracts
• Item 23 - Receipts

 Rules and Regulations Governing Operation of Franchise

Finally, there are several sections relating to restrictions imposed on the franchisee by the franchisor in conjunction with the franchise relationship.  In addition to rules concerning the appropriate use of franchisor trademarks and other intellectual property, these provisions may place restrictions on franchisees regarding where inventory, services, or supplies necessary to the operatioon  of the franchise may be obtained; the franchisee may be required to do business only with certain specified vendors.  In addition, the franchisor is required to make certain disclosures regarding revenue received by affiliates of the franchisor as a result of these restrictions.  The nature and extent of the franchisor's ownership rights in intellectual property, as well as any challenges to those rights, must also be disclosed.  If the franchisor wishes to prohibit a franchisee from selling any products other than the franchisor's or to require a franchisee to offer all of thfranchisor's products for retail sale, that must also be disclosed.  

• Item 8 - Restrictions on Sources of Products and Services
• Item 13 - Trademarks
• Item 14 - Patents, Copyrights, and Proprietary Information
• Item 16 - Restrictions on What the Franchisees May Sell

 RELATED PREVIOUS POSTS ON MY BLOG:

• The Franchising Route to Starting a Business offers suggestions, insights, and links to more in-depth information about how to get started looking into the franchising option

• The New Franchise Disclosure Document provides links to the FTC's website and resorrces concerning  implementation of use of the new disclosure format.

• What a Franchise Disclosure Document (FDD) Tells You About the Franchisor and the Franchise is a companion post to this one and focuses on the portions of the FDD related to the background and financial performance of the franchisor and franchisees within the franchise system.

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Whether you're thinking of trying a franchise as a replacement for the corporate job you hate (or perhaps no longer have), or believe that you have the best business concept since sliced bread  which you now want to share profitably, understanding the new Franchise Disclosure Document (FDD or sometimes UFDD) is key.  As a prospective franchisee, this document is essential reading in the due diligence process of determining if the business venture embodied in a particular franchise would be profitable and otherwise 'right" for you.  If you're thinking you might want to leverage your successful business by franchising the concept, you need to understand the scope and complexity of the information you will be required to provide potential franchisees. 

In Part I of this two-part post, I focus on what the FDD does to explain what a particular franchise is all about (think of it as the "sales" aspect of getting into a franchise).  To do this, I

• provide links to more in-depth resources regarding the FDD
• give a basic overview of its contents
• summarize the portions of the FDD related to information about the franchise opportunity, namely background and financial performance information. 

In Part II, I explore the other sections of the FDD which relate primarily to what is and will be required of the franchisee (think of it as the operational side of what it will mean once you ARE a franchisee), namely

•  the monetary financial investment required to be made by the franchisee both initially and on an ongoing basis
• the basic terms of the contractual relationship that will be the franchise arrangement,
• other operational rules with which the franchisee will be expected to comply.

Resource Links.   For those with the need or desire to understand in detail the legal basis for use of the FDD (found in 16 CFR 436) or wanting more extensive resources, I highly recommend visiting the Guidance Documents page on the  FTC website.  For the rest of us seeking a more practical treatment, the Franchise Rule Compliance Guide issued in May 2008 by the Federal Trade Commission is invaluable.  As an aid to understanding the nature of what the FDD contains, I have attached links to the examples contained in this publication throughout this post (and its continuation in my next post).  For a complete set of the sample pages contained in the FTC Compliance Guide, click here. 

If you're trying to put a FDD together, another helpful resource is the 2008 Franchise Registration and Disclosure Guidelines, together with the related Commentary, put out by the North American Securities Administrators Association, Inc. (NASAA).  These materials answer practical questions about the kinds of information that must be included.  They can also be useful in gaining a better understanding of what the FDD is designed to accomplish. 

Overview of FDD.  The FDD is required to be written in "plain English" and in case anyone is in doubt as to what that means, section 436.1(b) of the amended FTC Franchise Rule defines it as:

the organization of information and language usage understandable by a person unfamilar with the franchise business.  it incorporates short sentences; definite, concrete, everyday language, active voice, and tabular presentation of information, where possible.  It avoids legal jargon, highly technical business terms, and multiple negatives.

However, just because the FDD is required to be written in "plain English" doesn't mean it will be all that easy to digest and comprehend (or to prepare).  By the time you get through all of its informational sections and all of the attachments, you are talking about one thick document easily the size of a large phone book.  ALL OF IT IS IMPORTANT AND CRUCIAL TO UNDERSTAND!!!  

Although there are technically twenty-three separate sections of the FDD, for purposes of understanding what information can be obtained by reviewing the FDD, it can be divided into five main parts (for a brief and slightly differently organized summary, visit this U.S. News and World Report post on The Anatomy of an FDD):

• Background Information about the franchise, its ownership, and key management employees, as well as recent involvement in litigation
• Financial Performance Information about the Franchise, existing franchise outlets, and hypothetical new franchise outlets 
• Franchisee Required Financial Investment and Available Financing
• Basic Contractual Rights and Resposibilities of Franchisor and Franchisee
• Operational Rules and Regulations with which franchisees must comply in running their particular franchise outlet

Cover Page:

The new FTC Rule prescribes a particular format that must be followed EXACTLY by the franchisor to provide certain specific information on the cover page of the FDD.  In addition to the expected contact information and brief description of the nature of the franchised business being offered, the cover page must reference the FTC's Consumer's Guide to Buying a Franchise and include a sample of the primary business trademark required to be used in the operation of the franchised business.  In addition, both the initial investment described in more detail in Item 5 of the FDD and the total investment described in more detail in Item 7 of the FDD must be disclosed on the cover page.  There is also an "issuance" or 'effective" date listed on the cover page and language explaining how a prospective franchisee can obtain the FDD in another format.  

Background:

The first four sections of the FDD essentially provide background information about the franchise and its principals and management.  This information includes the business experience of the franchisor's key individuals in management, as well as the involvement of those individuals and the franchise itself in litigation as far back as 10 years in some instances.  In a change from the old Uniform Franchise Offering Circular (UFOC), franchisors are now required to disclose, by category,the number of legal actions initiated by the franchisor against franchisees, which involved the franchise relationship, in the immediately preceding fiscal year.  In addition, if any celebrity or other "public figure" is involved in the advertising and promotion  of the sale of the franchise, certain disclosures concerning the nature and extent of that individual's investment and/or management control must be made.  These sections are interesting and should not be overlooked, but they are not the most crucial part of the FDD,  These background sections of the FDD are:

• Item 1 - The Franchisor and any Parents, Predecessors, and Affiliates
• Item 2 - Business Experience
• Item 3 - Litigation
• Item 4 - Bankruptcy
• Item 18 - Public Figures [Involved in Marketing Franchise] 

Economics of Franchise Ownership - Financial Information About the Franchise and Existing Franchisees

Perhaps the most important, and certainly one of the most complicated parts of the FDD are the sections dealing with the recent and anticipated financial performance of the franchise, i.e. "how much money will I make?".  Franchisors are not required to provide any information about projected financial performance, but if they do, it must have a "reasonable basis" and the basis and assumptions pertinent to the representations made must be included in the disclosures required.  These portions of the FDD provide information about the franchisor, the franchise system as a whole, and at the individual franchisee level.  They include:  

• Item 19 - Financial Performance Information [of Franchisees {Historical or Projected}]
• Item 20 - Outlets and Franchisee Information [Number Affected by Particular Events]
• Item 21 - Financial Statements [of Franchisor]

 Next post will deal with remaining items of FDD and what they have to say about the franchisee's obligations.

RELATED PREVIOUS POSTS ON MY BLOG:

• The Franchising Route to Starting a Business offers suggestions, insights, and links to more in-depth information about how to get started looking into the franchising option

• The New Franchise Disclosure Document provides links to the FTC's website and resources concerning  implementation of use of the new disclosure format.

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Now that I'm well into YEAR TWO of this legal blogging thing, I thought it might be fun to take stock of the neighbors.  So today I am presenting what I think is a relatively comprehensive list of Ohio-based legal blogs, together with the date they started publishing and a few comments of my own.  My apologies in advance for leaving anyone out or getting start dates wrong. 

My criteria was basically legal blogs focused on Ohio law or authored by Ohio based attorneys.  I took a little stab at this several months ago in my My Favorite Ohio-Based Legal Blogs post, but this time I really looked around to be as inclusive as possible..

The oldest blog still going that I could find isn't even five years old, although there were a few blogs that I couldn't quite tell when they first began.   With the others, I relied upon whatever the earliest post in the archives seemed to be.  What's even more interesting, however, is the explosion in the number of Ohio-based legal blogs which started publishing last year. 

When it comes to law firms embracing blogs, Frost Brown Todd is the clear leader with four separate blogs.  Unfortunately, since all of the blogs are located on a subpage of Frost Brown Todd's website, casual access to the blogs and their content via search engines and otherwise is not as easy as it should be given the quality of the posts which all of the blogs boast.

BEST OHIO-BASED LEGAL BLOGS.  Some blogs just catch your fancy more than others.  For me, it's a combination of quality writing, interesting and helpful content, unique/intriguing perspectives, and generous links to other resources if I want to know more about the subject.  Some of the blogs listed below were fairly hard to find so I'm not intimately familiar with all the blogs on the list; however, I did at least try to get some sort of feel for each of these blogs once I found them. 

I don't pretend that I went through any scientific process to determine this, but  from my perspective as a semi-established Ohio law blogger, here are my picks (excluding myself, of course) for the 

BEST THREE OHIO-BASED LEGAL BLOGS 

• The Briefcase
• Cleveland Law Library Weblog
• Ohio Employer's Law Blog

Honorable Mention goes to:

• The D & O Diary
• Ohio Environmental Lawyer
• The Alternative Fee Lawyer 

AND NOW THE ROSTER >>>>

Since this is, after all, the Ohio Practical BUSINESS Law blog, let's start with blogs focused on business/corporate law:

BUSINESS/CORPORATE

• The D & O Diary - Kevin LaCroix, Oakbridge Insurance Services -May 2006 >>> Bills itself as "a periodic journal containing items of interest from the world of directors and officers liability, with occasional commentary".  Very detailed and well written posts from the perspective of someone interested in minimizing management liability.

• Corporate Governance Blog - Bricker & Eckler - NA >>> Offers "counsel for Boards and Executives" in generally short nonbylined to-the-point posts on timely issues.

• Business Law Prof Blog - Dan Oesterle, editor, The Ohio State University - May 2005 >>> "A member of the Law Professor Blogs network".  Frequent posts on business news items

• Banking L@w Blog  - Frost Brown Todd - NA >>> Provides the "latest information on banking litigation and dispute resolution",

• Cleveland Bankruptcy Lawyer Blog - Justin Smith - June 2008 >>> Covers bankruptcy  news and law from perspective of debtor.

•  Ohio.Merger.Blawg - Jim Rench, Stark & Knoll - November 2006 >>> Describes itself as "a blog on recent and topical developments in corporate transactions law."  Features commentary on news and events in business.

• Global Law - Frost Brown Todd - NA  >>> "Resource for business leaders within the international commerce industry". 

• Small Business Trends  - Anita Campbell - October 2003 >>>  This one really isn't technically a legal blog at all, but it does frequently cover business law topics and is edited by Ohio-based lawyer so I'm including it anyway.  Always informative posts on a variety of issues facing smaller privately held businesses. 

• Ohio Practical Business Law - Teri Rasmussen, Plunkett Cooney - October 2007 >>> Offers "practical guidance for making legaly informed business decisions".

LAW LIBRARY BLOGS

• Cleveland Law Library Weblog - Sue Altmeyer (?) -  March 2005 >>> "Our goal is to inform local attorneys of major legal developments important to their practice".  Very short -- but extremely informative -- posts, often concerning topics of interest and importance to the practice of law in Ohio.  Very newsy.  I frequently visit just to catch up on developments which may have otherwise slipped under my radar or to get ideas for posts.  GREAT links to other sources with more information about the topic being discussed.

• Cincinnati Law Library Blog - Chuck Kallendorf - July 2004 >>> Similar to the Cleveland Law Library Weblog, but less frequent posting.

• Moritz Legal Information Blog - Matt Steinke - January 2006 >>> Providing " "legal information and research resources brought to you by the Michael E. Moritz law Library at The Ohio State University".  Very short posts with limited frrequency

• Stark County Law Library Weblog - Nancy Stinson - November 2008 >>> "Serving the legal community of Stark County, Ohio" by presenting playful, fun posts on legal topics of interest.  This looks like a blog I ought to frequent more often.  Recently received a  Blawggie from  DennisKennedy.com for Best Legal Blog Digest.

LABOR AND EMPLOYMENT

• Ohio Employer's Law Blog - Jon Hyman, Kohrman, Jackson & Kranitz - May 2007 >>> Promises "practical employment law information for business in ohio and beyond"  and delivers.  Generally short pithy posts on practical matters employers definitely need to know.  Its WIRTW (aka What I'm Reading this Week" segment is a useful round-up of other blog posts in the area of labor and employment.

• Employer's Law Report - Porter, Wright, Morris & Arthur - December 2007 >>> Presents posts "reporting on recent legal developments and trends affecting employers."  Personally  i like the "Employment Outtakes"category which feature sometimes humorous situations which would probably have gone better had an employment lawyer been consulted. 

• HR Source Legal Source - Tod Morrow, Hans Nilges, and Susan Chae, Buckingham, Doolittle & Burroughs, LLP - NA >>> Featuring posts regarding "labor and employment law for hyman resources professionals".  

• The Ohio Labor Lawyers - Matthew Austin, Mason Law Firm - December 2008 >>> Promises that "we change the way you deal with unions" and posts from the perspective of management.   Features "What If Wednesdays" weekly posts about what to do "if certain things in the world of labor happen to you." 

• The Ohio Employment Lawyers - Aaron Tulecik, Mason Law Firm - December 2008  >>> Promises that "we solve your workplace issues"  Posts on employment  law news from perspective of management.

• Employer Notes - Frost Brown Todd -- NA  >>> Provides the "latest information regarding employers".

REAL ESTATE

•  Ohio Real Estate Blog - Kohrman, Jackson & Kranitz - April 2008 >>> Useful posts by various firm attorneys on a wide variety of real estate law topics

•  Real Estate Advisor Law Blog - Brian Kaplan, Ulmer & Berne - December 2008 >>>  Describes its purpose as "disseminat[ing] pertinent information in a timely manner relating to real estate, construction, financing, environmental and related matters... [and designed] to identify trends and opportunities that our clients and contacts deem important for their businesses." 

CONSTRUCTION

• Construction Law News - Frost Brown Todd - NA >>> Bills itself as "a resource for construction industry professionals".

• Build on This - Rana Gorzeck, Buckingham, Doolittle & Burroughs - (March 2005 - August 2008, now apparently defunct) >>> Presenting "current news, information and events affecting the real estate construction and land use industry and its professsionalism"

ESTATE PLANNING

• The Ohio Trust & Estate Blog,- Michael D. Bonesera, Dinsmore & Shohl, LLP - NA >>> Helpful, relatively short posts concerniing trusts and estate planning issues 

• Ohio Estate Planning, Trust & Probate Law - Bradley Wrightsel, Wrightsel & Wrightsel - 2008 >> Describes itself as "a law blog (BLAWG) for professionals and the general public in ohio regarding estate plannig, trust, and probate law."

  CRIMINAL LAW

• The Briefcase - Russ Bensing - May 2006 >>> Describes itself as "commentary and analysis of Ohio law".  This remains one of my favorite blogs to look in on periodically even though the subject matter isn't one with much relvance to my practice areas.  I enjoy Russ's wit and storytelling ability as he posts about various adventures as a criminal lawyer.  And his Ohio appellate case summaries are useful too.  

• Sixth Circuit Blog - Federal Defenders of the Sixth Circuit - April 2005  >>> Providing "case summaries and commentary by federal defenders of the Sixth Circuit"   

MISCELLANEOUS

• Consumer Rights Law Blog - Ron Burdge - 2005 >>> Addresses "motor vehicle lemon law, consumer protection law, auto industry news, notes, issues and updates".   Very attractive layout featuring  posts of interest to consumers.

• Ohio Family Law Blog - Robert Mues, Holzfaster, Cecil, McKnight & Mues, LPA - December 2007 >>> Offering "family law and divorce information for Ohio families seeking solutions".  Frequent guest contributors.  Helpful, very accessible, posts focusing on important issues in this area.   

• Tsibouris & Associates Law Blog - Dino Tsibouris and Mehmet Munur, Tsibouris & Associates - January 2005 >>>  interesting posts on a variety of subjects, but with special emphasis on technology law, privacy and security law and issues involving financial services.

•  The Alternative Fee Lawyer - Michael Grodhaus, Waite, Schneider, Bayless & Chesley - January 2008 >>> Featuring "an Ohio business lawyer's reflections on alternatives to the billable hour in setting legal fees for business clients".  Insightful, if somewhat sporadic, posts on an extremely timely and important  topic . This is a blog that I would really like to hear more from.

• Ohio Environmental Law Blog - Joseph Koncelik, Frantz Ward, LLP - June 2008 >>> Presenting "insight and commentary for the business and legal community" regarding environmental law. 

• Juvan's Health Law Update - Jayne Juvan, Benesch, Friedlander, Coplan & Aronoff, LLP - September 2006 >>> Presents posts "at the intersection of health care and private equity".

• Ohio Law Blog - Morrison & Nicholson, LLC - December 2007 (very sporadic posting, primarily in December and January)

• Sixth Circuit Blog - Eric Zagrams - last post in November 2008, rather sporadic before then  >>> Says that it is "devoted to appellate law and practice within the Sixth Circuit and constituent States." 

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Last week, in a relatively unheralded decision (which didn't even rate an "official" summary by the Court's Public Information Office), the Ohio Supreme Court served notice that there's more than one way to look at certain aspects of the deepening foreclosure crisis.  In Wilborn v. Bank One Corp., 2009-Ohio-306 (hat tip to Justin Ristau for his summary in a Bricker & Eckler Creditor Rights & Bankruptcy E-Alert which called my attention to the case), the Court arguably departed a bit from established precedent to uphold an attorney fee shifting provision in the context of a residential mortgage reinstatement following the commencement of foreclosure proceedings.  Why?  Because the stability of the market demanded it.  But I'm getting ahead of myself here.

In my last post, I explained that generally speaking, everyone pays their own attorney fees in the United States, regardless of whether they wind up on the winning or losing side.  I also mentioned that one exception to this general rule was when the parties agreed between themselves that a particular party or parties was entitled to recover their attorney fees from the other side in the event they ultimately prevailed.  But that this sort of provision only really worked where both sides had relatively equal bargaining power.

Nearly all commercial loan documentation contain provisions obligating the borrower to pay the lender's attorney fees incurred in connection with the lender's enforcement of its rights under those documents.  Many consumer mortgage documents also contain such a provision.  However, in Ohio, up to now there have been several cases involving the enforceability of such provisions in the context of the enforcement of a debt -- and in foreclosure proceedings in particular -- which have generally found them to be against public policy and thus not enforceable.

What Wilborn Held.  What make Wilborn interesting is that, particularly in the current foreclosure crisis and overall difficult financial situation, it would have been VERY EASY for the Court to strike down the attorney fee shifting provisions.  While addressing a fairly unique fact pattern, the Court's naked capitalist reasoning and what it may portend for subsequent attorney fee shifting cases are worth examining. 

In Wilborn, the Ohio Supreme Court's syllabus states:

A provision in a residential mortgage contract requiring a defaulting borrower to pay a lender's reasonable attorney fees as a condition of terminating pending lender-initiated foreclosure proceedings on a defaulted loan and reinstating the loan is not contrary to Ohio statutory or decisonal law or against Ohio public policy 

Wilborn  Facts and Procedural History.  The case involved an appeal by 11 different plaintiffs in a class action (apparently a declaratory judgment action) challenging the enforceability of an attorney fee provision in a standarized residential mortgage.  After the lender had initiated foreclosure proceedings (but prior to the entry of a foreclosure judgment decrees), the plaintiffs had all entered into some sort of reinstatement of their defaulted mortgage.  In addition to bringing the defaulted mortgage current, the lender required the plaintiff borrowers to reimburse the lender for its attorneys fees and other collection costs.  The trial court dismissed the case on the grounds that payment of attorney fees as a condition for reinstatement was permissible.  The Court of Appeals affirmed.

The Reasoning.  The Ohio Supreme Court acknowleged that two very ancient cases - namely Leavans v. Ohio Natl. Bank, 50 Ohio St. 591 (1893) and Miller v. Kyle, 85 Ohio St. 186 (1911) - had long stood for the proposition that attorney fee provisions in connection with the enforcement of a debt obligation, particularly in foreclosure situations, were not enforceable.  It also recognized the holdings of Nottingdale Homeowners' Assn v. Darby, 33 Ohio St3d 32 (1987) and Worth v. Aetna Cas. & Sur. Co., 32 Ohio St3d 238 (1987)  to the effect that such provisons had to be the product of bargaining between parties of equal strength.

Now in the current economic climate, the plaintiffs-borrowers probably expected - and I certainly would not have been surprised  - the Ohio Supreme Court to apply these precedents easily and strike down the attorney fee provisons forcing poor defenseless folks on the verge of losing their homes to pay big bad banks for their legal costs in enforcing a mortgage that might even have been unfairly foisted upon the homeowner in the first place.  But that's not what happened. 

Not Against Public Policy

Instead, the Ohio Supreme Court first drew a distinction between foreclosure proceedings to enforce a mortgage and reinstatement.  It held that "reinstatement is not the enforcement of a debt obligation" and that consequently the public policy considerations of the ancient cases concenring "imposition of a penalty' were simply not relevant.  The Court explained:

A defaulting borrower is not entitled by law to have a mortgage loan reinstated.  Upon a borrower's default, a lender is entitled to initiate  foreclosure proceedings, to be paid in full, and to sever its relationship with the defaulting borrower.  A defaulting borrrower's right to reinstate the mortgage loan arises solely from the terms of the residential mortgage agreement between the parties.  Reinstatement occurs only when the defaulting borrower chooses reinstatement and consequently, chooses in the existing foreclosure proceeding to forgo those statutory protections arising from the foreclosure process.  The defaulting borrower's agreement to pay the lender's attorney fees incurred in connection with the foreclosure proceedings is a reasonable exchange for the right to require the lender to reinstate the defaulted mortgage loan and to forbear the lender's legal rights to foreclose, be presently paid in full, and sever the relationship with the defaulted borrower.

Thus, a mortgage reinstatement provison in a residential mortgage agreement creates no obligation on a defaulting borrower to pay a lender's attorney fees until the borrower exercises his or her choice to reinstate.  Thus the borrower's obligations to pay such fees does not arise solely as a consequence of the lender-initated foreclosure action.  instead, the obligation arises only upon the defaulting borrower's voluntary exercise of the contractual right to reinstate the mortgage loan, a right gained in exchange for the lender's surrender of the present right to foreclose.  

No Negative Implication of ORC 1301.21

The Ohio Supreme Court also found unpersuasive the borrowers' argument that the negative implication of Ohio Rev. Code 1301.21 - which is relatvely recent  (in the sense that it has become law during the course of my legal careeer)  and DOES allow attorney fee shifting provisons in larger commercial loans - was that the General Assembly did not intend to all such provisons in the consumer mortgage context.  Frankly, I thought this was a pretty good argument. but the Court simply put blinders on and said, well that's not what is says. 

No Contract of Adhesion - Equal Bargaining Power Exists

Perhaps even more surprising was the Ohio Supreme Court's choice to go "big picture" when considering the relative bargaining strength of the parties to a residential mortgage.  Instead of focusing on the obvious vast chasm in bargaining power between the individual homeowner and the lender, the Ohio Supreme Court instead chose to consider the entire business and commercial context in which the terms of the standarized mortgages were determined, launching into an extensive recitial of how Fannie Mae and Freddie Mac came to have standardized forms at all.  Thus, according to the Ohio Supreme Court:

although none of the Borrowers or Lenders in this case were involved, those who did participate in the process that created the uniform mortgage forms were virtual proxies for the consumers and lenders who would eventually use the product.  That process brought together many sophisticated parties with competing interests and significant bargaining power.  The reinstatement provison, including the payment of attorney fees incurred by the lender as a condition of reinstatement, was thus agreed to in a representative process of free and understanding negotiation between parties with equal bargaining power. 

Public Policy In Fact Demands Upholding Attorney Fee Shifting Provisions

In what must have seemed to the borrower-plaintiffs like adding insult to injury, the Ohio Supreme Court went on to conclude that not only did public policy not preclude enforcement of the attorney fee provisions- it in fact DEMANDED enforcement of such provisions.  As the Ohio Supreme Court saw it, weighing in the balance was nothing less than the stability of Ohio's mortgage business itself:

public policy strongly favors the use of these uniform mortgage forms to further Congress's stated purpose and to permit the trading of Ohio's conventional mortgages on the secondary market.  To declare some part of these forms unenforceable would make Ohio less competitive in the secondary mortgage market, thwarting the objectives of the Fannie Mae and Freddie Mac enabling legislation, denying lenders liquidity for their investment portfolios, and decreasing the capital available to borrowers for mortgages.  in light of the economic difficulties afflicting the national economy as of late, and particularly in the housing sector, our decision today also serves the public policy of this state by avoiding further destabilization,  

Bone to the Borrower

Almost as an afterthought, the Ohio Supreme Court threw borrowers a bone in a footnote to the effect that of course the amount of attorneys fees must still be "fair, just and reasonable as determined by the trial court upon full consideration of all the circumstances of the case." 

Some Thoughts and Implications.  While the gulf in bargaining power between consumer advocates and lenders is not nearly so wide as that between lender and consumer borrower, I'm not altogether convinced that characterizing the parties involved in hammering out the standardized mortgage forms as being of equal bargaining strength is all that accurate. 

In addition, while I "get" the distinction between foreclosure as a debt enforcement procedure and the "privilege" of reinstatement, I'm not convinced that such a distinction necessarily matters when it comes to public policy.  Personally, I've always felt that with consumer obligations such as auto loans or home mortgages, a slight presumption towards the consumer was not necessarily a bad thing.  My rationale is that, unlike business and commercial loans, in which someone has voluntarily decided to enter the business world in the hopes of making considerable money (and therefore needs to be willing to accept the risks of failure), home and auto loans are part of the fabric of everyday existence in America and are essentially unavoidable obligations.  As such, it is more appropriate for there to be protections for the borrower. 

Perhaps one of the ironic outcomes of this decision is that small commercial enterprises involved in commercial transactions with larger more powerful business partners may now actually have greater protection against an attorneys fee provision than the average consumer mortgage borrower.

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One of the questions I get asked most often by clients, even sophisticated executives, is whether they will be able to get reimbursed for the attorney fees they are paying me if we win.  And of course, they are always disappointed when I answer, well, probably not, especially if you don't have it in your documents to begin with.   

American Versus English Rule.  Ohio, as (nearly?) everywhere else in America, follows the "American Rule" that generally each party, win or lose, is responsible for  the payment of their own attorney fees.  See Nottingdale Homeowners' Assn v. Darby, 33 Ohio St3d 32 (1987).  Most of the rest of the world (including Great Britain) follows the English Rule's "loser pays" system in which the losing side routinely has to pay the attorney fees and related litigation expenses of the victorious party.  As one might expect, in some jurisdictions, there is of course some measure of "insurance coverage" one can buy from private companies in exchange for payment of an appropriately priced premium to cover the unfortunate possbility of defeat.

• Recently Dan Slater of the WSJ examined "The Debate Over Who Pays Fees When Litigants Mount Attacks", concluding that the "loser pays" system would be better because it cuts down on frivolous lawsuits.

Exceptions Within the American Rule.   As with any good rule of law, there are naturally exceptions to the American Rule (see Columbus Check Cashers, Inc. v. Rodgers. 2008 -Ohio- 5498 (10th App. Dist.)):

• Statutory Mandate
• BadFaith/Unjust Enrichment 
• Contractual Agreement

Statutory Mandate

In part because of the perceived egregiousness of the injury if proven, certain claims - notably in the discrimination area - are covered by explicit statutory provisions which allow for collection of one's attorneys' fees if victorious.  Other examples are certain consumer protection laws. 

In the business context, I've previously posted about collection of attorney fees (and other damages) with respect to bad checks.  Another useful example is the provisions of Ohio Rev. Code 1301.21 that allows enforcement of provisions for reasonable attorney fees in contracts in excess of $100,000 which do not evidence a debt which is primarily personal, family, or household in nature.

Bad Faith; Unjust Enrichment 

In a FEW, RARE - no, this is PROBABLY NOT your case - situations, a Court may find that a lawsuit has been brought, or that a defense has been advanced, in bad faith.  In these situations, a litigant can ask the Court to force the other side to pay its attorney fees.  Let's be very clear about this exception: IT DOES NOT HAPPEN VERY OFTEN!!!  

It's also possible, although also rather unlikely, that a Court may determine that one party has been unjustly enriched as the result of another party's actions.  Thus, for example, an innocent retailer might (but probably will not) be able to recovery its attorneys fees spent defending a products liability lawsuit in which the manufacturer is the actual party with liability

Contractual Agreement

The largest gap in the American Rule occurs when parties have contractually agreed to pay the other's attorney's fees in the event of being on the losing end of some dispute arsing out of the contractual arrangement.  The key, in Ohio and elsewhere, is whether sophisticated parties freely negotiated the terms requiring payment of the attorneys fees of the prevailing party.  Worth v. Aetna Cas. & Sur. Co., 32 Ohio St3d 238 (1987)   However, agreements to pay attorneys fees in a "contract of adhesion, where the party with little or no bargaining power has no realistic choice as to terms" are not enforceable.  Nottingdale Homeowners' Assn v. Darby, 33 Ohio St3d 32 (1987). 

In particular, one-sided attorney fee shifting provisions in which only one side (e.g. the borrower) has to pay the other's attorneys fees in the event that side prevails - but the reverse is not true - have generally been held unenforceable.   (see Columbus Check Cashers, inc. v. Rodgers. 2008 -Ohio- 5498 (10th App. Dist.) 

However, the Ohio Supreme Court's recent decision in  Wilborn v. Bank One Corp., 2009-Ohio-306 (which I will discuss in detail in my next post) may throw at least a little hope to parties wishing to impose attorney fee shifting provisions on others, but only in some fairly unique circumstances.

BIZPOINTER: Bottomline, if you want to be able to be reimbursed for any attorneys' fees you wind up incurring with respect to enforcing a contract or other agreement, it's likely to be a double-edged sword.  To maximize the liklihood of a court enforcing such a provison in your agreement, you may have to be willing to accept an "equal opportunity" type provision that gives this right to the "prevaiing party", regardless whether that's you or the other side.

Even if it is in the agreement, expect any such provision to be challenged on the basis that you were the domineering force and the other side had no bargaining ability to avoid the inclusion of such a provison.

And if it's not in your agreement or the lawsuit isn't about the breach of a consensual agreement, you should probably just forget it in most cases.

SOOO...   like I said, probably not going to be able to get the other side to pay your legal fees.  Sorry.

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We've all been taught that American business is built on the concept of competition and free enterprise.  At the same time, we all have a deep-rooted metaphysical sense of "fairness" which sets the outermost limits on where we are willing to let "pure" competition go.  Where that line goes is what "tortious interference" with business or contract is all about.  In essence a "tortious interference" claim is about saying that a competitor in the marketplace misused information or otherwise just went  "over the line"  when it came to the tactics used to solicit clients, obtain business that the complaining plaintiff believes should rightfully have been his, cause customers to stop patronizing another's business, or otherwise adversely affect the competitor's business and/or financial prospects.

The tort of "tortious interference", whether with "contract" or with "a business relationship", is one of the most common claims made in business disputes.  It is often seen in tandem with allegations of misappropriation of trade secrets, breach of confidentiality or non-compete provisions, or defamation claims.  The difference between the two flavors of tortious interference is that "tortious interference with CONTRACT" requires the wrongdoer to have impermissibly adversely affected an ACTUAL formal contract in place between the complaining plaintiff and another entity; "tortious interference with BUSINESS or BUSINESS RELATIONSHIP" is broader and includes intentional interference by the wrongdoer with business dealing of the complaining plaintiff with another entity which may not yet have resulted in a contractual relationship.

Tortious Interference with Contract.  In Ohio, the Ohio Supreme Court recognized the existence of a claim of tortious interference with contract in Kenty v. Transamerica Premium Ins. Co., 72 Ohio St.3d 415 (1995).  It joined a number of other states in adopting the definition set forth in the Restatement of the Law 2d, Torts:

One who intentionally and improperly intereres with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract is subject to liability to the other for pecuniary loss resulting to the other from the failure of the third person to perform the contract.

To prevail on a claim alleging tortious interference with contract, you must show all of the following:

• the existence of a contract
• defendant's  knowledge that contract existed
• defendant wrongdoer's intentional interference and procurement of breach of contract
• defendant wrongdoer's lack of justification for his actions
• damages resulting from contract breach

 The contract interfered with can be express or implied.  It does not have to be a written agreement.

Tortious Interference with Business Relationship.  Ohio  law also recognizes claims for tortious interference with a business relatinship applicable when there may not have been a specific contractual relationship.  A&B-Abell Elevator Co. v. Columbus/Cent. Ohio Bldg. & Constr. Trades Council, 73 Ohio St.3d 1 (1995).  Here, one must show:

• existence of a business relationship
• defendant's knowledge of the business relationship
• defendant wrongdoer's intentional interference causing a breach or termination of the relationship
• damages resulting from wrongdoer's actions

In both cases, the wrongdoer must have acted intentionally and the interference must have been without justification.  To determine whether the defendant acted improperly, the Ohio Supreme Court set down the following factors in Fred Siegal Co,, L.P.A. v. Arter & Hadden, 85 Ohio St.3d 171 (1999):

• nature of the defendant's conduct
• defendant's motive
• business interests of the complaining plaintiff which were interfered with
• interests sought to be advanced by the defendant
• weighing of the social interests in protecting the defendant's freedom of action versus protecting the plaintiff's business and contractual interests
• proximity of defendant's actions to the alleged damages caused
• relations between the parties.

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In my last post, I highlighted a post by Mark Edwards at the Concurring Opinions blog focused on the plight of perhaps "blameless" tenants being evicted from property being foreclosed upon.  Although I think Mark has overstated the problem somewhat, I also believe he raises an excellent point of general application reminding us that there is a "human" consequence entailed in foreclosure that shouldn't just be ignored.

Keith Mullen of the Tough Times for Lenders blog who brought my attention to Mark's post has followed up with a post entitled "Foreclosure and the Residential Tenant: Some Helpful Hints".  In this post, Keith explains that commercial lenders should be more concerned about this topic because"the time will come when evicting a small business owner, or evicting families who occupy abandoned property (or a model home), or evicting laid-off workers occupying an abandoned warehouse ofr factory will gain the attention of the local media."  His suggestions, aimed at getting the property back "while managing media coverage":

• Realize that a broader spectrum of people and entities may need to be notified, i.e get the lender's community/governmental relations group involved so that they can "rach out to local community organizations and governmental agencies".
• As soon as you have the legal right to do so COMMUNICATE directly with the occupant(s) about the process and options available to them (e.g. local community and governmental resources)
• Consider entering into short-term leases both as a bridge to finding a replacement tenant and to allow occupants to find other housing
• Examine title records to determine any restrictions burdening the property.

Commercial lenders DO need to be concerned about the likely increasing complications involved in regaining possession of real property, but Keith's list seems to me to miss the point, both from the lender perspective of wanting the shortest least complicated route to clean possession and resale of the property and from the perspective of addressing the true underlying problem.  The challenge presented by the presence of perhaps unwanted occupants in foreclosed property is not as simple as just shoving the problem off to another division of the lender, but neither does it have to be a circus.   

Foreclosure, at least in Ohio, is not an especially swift process (click here and here for previous posts describing the procedures in Ohio). The best way to deal with the problem of squatters and/or other potentially unwanted occupants is to obtain the appointment of a receiver to manage the operation of the property and to sort out the occupancy issues during the pendency of the case.  Properly handled, any "media' issues should be able to be dealt with incrementally.  In addition, Keith's idea of utilizing short term leases to ameliorate any harshness entailed as a result of the forclosure process also seems like a useful approach.

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As a footnote to my last couple (click here and here) of posts about the Ohio foreclosure process, I thought it would be worthwhile to link to this recent post on "Evicting the Blameless Tenant"  by Mark Edwards of the Concurring Opinions blog which, especially for a legal blog post, has drawn substantial vociferous comments.  (Hat tip to the Tough Times for Lenders blog for their aptly titled "The Very Dark Side: Evicting tenants from foreclosed apartments" for drawing my attention to this post and pointing up the dichotomy between the lender/servicer view of apartment investment real estate as "project collateral" and the owner/investor (and certainly the tenant) perspective of an "apartment community").

This extremely well written post  poses the question of who as between a lender and a tenant should bear the risk of foreclosure.  It begins:

One of the most pernicious effects of the mortgage crisis has been the eviction of blameless tenants. Leases are usually terminated by foreclosure. Tenants who have never missed a rent payment, and who have no idea that their landlord has not been applying rent payments to their mortgage obligations, suddenly face eviction -- often with no notice.

 

It is difficult to overstate the trauma of the eviction. Tenants are not only turned out into the streets. Often their personal property is put on the curb or thrown into dumpsters. They don't just lose their homes -- they can lose everything they own. Passing rainstorms or scavengers can turn a lifetime's worth of work into nothing. Children in particular can be traumitized by seeing parents rendered powerless, by losing their possessions, and by the fear of the unknown. Violence is a constant threat.

While it is hard not to be moved by these words, it remains difficult for me to be believe that lenders routinely make the effort to boot out truly "blameless" tenants.   Although I can certainly conceive of situations in which tenants have dutifully paid their rent to an unscrupulous landlord who has filed to make mortgage payments, thus resulting in a foreclosure. it remains difficult for me to believe that the truly "blameless" tenant, whether residential or commercial, is all that frequently in danger of being thrown out on the street without warning.  For one thing, at least in Ohio, they would need to be named as defendants in the foreclosure for their rights to be definitively cut off.  

If the tenant is willing and able to continue paying rent at something close to a market rate, I just can't imagine that any purchaser in their right mind would want to disturb such a scenario.  In my experience, low vacancy properties with paying tenants are precisely the sort of commercial real estate valued most highly.  Why?  Because it's a turnkey operation and all the new owner has to do is notify the tenant(s) of a new address to which rent checks should be sent.  Why would any rational purchaser want to dump perfectly good tenants in favor of having to expend resources of time and money to go out and find others?

What I suspect is more likely the case is a situation in which the tenant has perhaps been a bit lax in consistently making timely rent payments - perhaps not so much deliquent that the property owner would be inclined to go to the trouble to get the tenant out, but enough to adversely affect the value of the property as a commercial investment.  In this scenario, it is not the "pure as the driven snow"  tenant we all feel for that we are really talking about.  

And now we are really back to the central issue in the larger foreclosure crisis - what to do about people who can no longer afford to remain in their homes and whether it matters whether we think they are at fault for allowing themselves to be in this situation.  Edwards (correctly in my view) recognizes that '[f]or the bank, the risk is that it is saddled with the responsibility of property management, and that it might be more difficult to sell the property".  He goes on to contend that the relative harm to the tenant of possible eviction and loss of personal property is higher and that

the absolute harm to society in general is greater [than the harm to the lender] when blameless tenants are evicted because of foreclosure, because eviction of blameless tenants has significant negative externalities for neighborhoods and cities. 

A number of the comments to the post (which are themselves interesting to read) seem to elicit an unusual amount of passion. and appear preccupied with allocating the moral supeiority high ground between the lender and tenant.  One more cogent comment by Nate Oman made the most sense to me and reflects my own questions as I read the post:

I am curious as to the underlying economics of these foreclosures. I can understand why the banks don't want to go into the property management business, but I don't see why avoiding that business requires evicting the tenants. Why can't the banks simply sell the properties along with the leases, which if the tenants really are blameless are a valuable income stream after all?

 

It seems to me that there are two possible issues. First, banks can't sell occupied property. Second, the leases lock in rental rates that no longer pay for the landlord. Niether of these seem intuitively plausible to me. The first possiblity is certainly belied by the routine sale of occupied commercial real estate. The second seems odd to me as well. If rent was somehow tied to the land lord's costs, then we would expect leases written at the height of the bubble to actually have very attractive terms given the current real estate market.

 

In short, I am confused as to exactly why this is happening. I suspect that there is some important part of the story that we are missing, and I'd like to understand what it is before signing off on any particular policy response.

While I certainly agree that commercial foreclosures could result in "collateral damage" to those actually living in the foreclosed property and that the"human element" of displaced residents raises issues that need to be addressed, I see these as social issues to be dealt with in a larger context.   Simply saying that because the lender has deeper pockets, it should have to deal with the problem (and in essence maintain the status quo of allowing continued occupancy of an apartment complex without regard to whether market rate rate is being paid by the third-party tenant)  seems too superficial (and frankly unfair) a solution to the issue. 

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In my last post, I made some overall observations about Ohio's required judicial foreclosure procedures and explained the initial steps necessary to begin the foreclosure process.  In this post, I will explain what is involved, once the Complaint has been properly filed, in getting the property being foreclosed upon to sheriff's sale

One other caveat about this explanation is that it relates to foreclosures filed in STATE court as opposed to FEDERAL court.  While foreclosures are generally filed in state court, especially when receivership is involved, if diversity jursidiction can be met, foreclosures are now being filed somewhat more often in federal court.  in Ohio, this seems to happen most often in Cuyahoga County where the federal court route is perceived as a faster track option.

STEP THREE - Receivership Detour.  (Less than one day to several weeks after Complaint is filed.)  When commercial investment property is involved such as an office building, apartment complex, or multi-family property, the real property is generating revenues in the form of rental payments from tenants.  Lenders wanting to protect that stream of income and apply it to the defaulted loan will often seek appointment of a receiver to manage the property.  In addition, property securing defaulted loans has often been the subject of deferred maintenance and lenders are frequently concerned about deteriorating value of the property as a result.

Virtually all commercial loan mortgages securing a loan of any size have explicit provisions in them pursuant to which the mortgagor consents in advance to the appointment of a receiver in advance.  The following is a very typical such provision:

If an Event of Default has occurred and is continuing, regardless of the adequacy of Lender’s security, without regard to Borrower’s solvency and without the necessity of giving prior notice (oral or written) to Borrower, Lender may apply to any court having jurisdiction for the appointment of receiver for the Mortgaged Property to take any or all the actions set forth in the preceding sentence. If Lender elects to seek the appointment of a receiver for the Mortgaged Property at any time after an Event of Default has occurred and is continuing, Borrower, by its execution of this instrument, expressly consents to the appointment of such receiver, including the appointment of a receiver ex parte if permitted by applicable law.

Thus, commercial borrowers have by contract usually agreed to the appointment of a receiver in the event of a default. 

If for some reason, the mortgage lacks the requisite language consenting to appointment of a receiver,  Ohio Rev. Code 2735.01 permits appointment of a receiver when:

 A receiver may be appointed by ... the court of common pleas or a judge thereof in his county … in the following cases:            …

(B) In an action by a mortgagee, for the foreclosure of his mortgage and sale of the mortgaged property, when it appears that the mortgaged property is in danger of being lost, removed, or materially injured, or that the condition of the mortgage has not been performed, and the property is probably insufficient to discharge the mortgage debt;

…

(F) In all other cases in which receivers have been appointed by the usages of equity.

Appointment of a receiver is also permissible under common law whenever it will prevent a wasting of assets. 

To expedite appointment of a receiver, a motion seeking appointment of a receiver is usually filed at the same time as the Complaint.  Technically, the identity of a receiver and the terms of his/her appointment are up to the Court, but generally (although this varies considerably from county to county and from judge to judge) the Court will follow the suggestion of the foreclosing creditor.  Once appointed, the party appointed as receiver will have to post a bond in an amount set by the Court.

While appointment of a receiver often makes sense with respect to income producing property, lenders must weigh those benefits against the additional costs associated with receivership such as the premium for a receiver's bond, fees and expenses of the receiver, and additional attorneys' fees.  

STEP FOUR - Obtaining Decree in Foreclosure.  (No less than 6 weeks, generally 16-24 weeks, sometimes much longer.)  Once the Complaint, and any applicable motion for a receiver, is filed, service of process must be obtained upon the defendants just as in any other lawsuit.  Generally, service is first sought by way of certified mail, then by regular ordinary first class U.S. mail, and then, if necessary, by appointment of a special process server or by advertising.  Obtaining good service on all defendants may take as little as a week or several months; generally this process only takes about a week or two.

Twenty-eight (28) days after being served, a defendant must file an answer to the Complaint.  If no answer ot other responsive pleading is filed, a default judgment will be entered against the defendant.  If a senior lienholder fails to answer, their lien can be eliminated without. any payment to the lienholder so it is important not to ignore a foreclosure initiated by another creditor.  If the foreclosure has been commenced by another creditor, a creditor has the option of  either (A) "crossclaiming" by setting forth its own foreclosure claims which can continue even if the first creditor resolves its differences with the delinquent borrower; or (B) simply filing an answer setting forth its interest in the property being foreclosed.

If one or more defendants answer, then a motion for summary judgment must be filed before a decree in  foreclosure can be obtained.  If factual issues exist, a full-blown trial may even be necessary. 

Unless and until a receiver has been appointed, the delinquent mortgagor may remain in possession of the real property throught the pendency of the foreclosure proceeding.

STEP FIVE - Setting a Date for Sheriff's Sale.  (No less than 6 weeks and often much longer.)  After the Court has entered the Decree in Foreclosure, whether by default judgment, grant of a summary judgment motion, or following trial on the merits, a separate Order of Sale must be entered directing the Sheriff to sell the subject property at auction,  Once the Decree in Foreclosure has been obtained, the Order of Sale is a formality and serves as the operational document to put the mechanics of the foreclosure sale procedure in motion.

Pursuant to Ohio Rev. Code 2329.17 and Ohio Rev, Code 2329.18, the Sheriff must obtain an appraisal of the property from three (3) appraisers and file a copy of the appraisals with the Court.  The Sheriff handles the appraisal process on his own without intervention, consultation, or assistance from the foreclosing creditor.  The average of the appraisals establishes a floor below which the property cannot be sold; pursuant to Ohio Rev. Code 2329.20, the required MINIMUM BID is TWO-THIRDS of the APPRAISED VALUE based on the appraisal filed with the Court. 

Before the real property can be sold, Ohio Rev. Code 2329.26  requires that a notice of sale, showing time and place of sale, address of the property,and certain other required information,  must be published in a newspaper of general circulation within the county beginning at least thrity (30) days before the date of sale.  The notice must be published at least once a week, on the same day of the week, for at least three weeks.  All defendants (other than those who failed to respond to the Complaint) must be served with the notice of sale at least seven days before the sale. 

STEP SIX - Selling the Property at Sheriff's Sale.  Once the date of sale has been obtained and proper notice has been sent out, there is little for anyone to do but wait.   While Ohio Rev. Code 2339.272 permits the Sheriff to hold an "open house" at which prospective purchasers may view the property being foreclosed upon, in my experience, that rarely, if ever, happens.  Commercial investment property has typically remained open to the public thoroughout  the foreclosure proceedings so in these cases, perhaps the need for an "open house" is relatively small.  However, in residential foreclosures, the borrower may have moved out and the actual condition of the property may not be readily apparent.   In both cases, the doctrine of caveat emptor, i.e."buyer beware" has never been more applicable.  There are NO warranties about the condition of the property being sold at foreclosure sale, the successful purchaser is buying "AS IS, with all faults". 

And, no, the foreclosing lender will not make arrangements for prospective bidders to get inside to see the property so don't bother even asking!

On the appointed date of sale, the Sheriff holds an auction sale of the property, often quite literally on the steps of the County Courthouse, with bidding beginning at two-thirds of the appraised value as determined by the Sheriff. Thus, if the real property has been appraised at $150,000, it cannot be sold at sheriff's sale for less than $100,000.   If no one is willing to purchase at the required minimum bid, the property will be re-appraised and re-noticed for sale. 

The highest bidder becomes the succcessful purchaser of the property and is awarded ownership of the property free and clear of all liens belonging to defendants named in the forecosure action.   Typically, the successful bidder is required to make an immediate down payment to the Sheriff of at least ten percent of the winning bid with the balance due within a specified time thereafter, usually 15-30 days.  The foreclosing creditor is permitted to bid at the sale and if it is the successful high bidder, it need only pay the amount, if any, by which its successful "credit bid" exceeds the amount owed to te foreclosing creditor.  In addition the successful bidder is permitted to assign its bid to another party on whatever terms are agreeable between it and its assignee upon the filing of approriate pleading to the effect with the Court.

For the sake of comparison, it may be helpful to visit a post on the Calculated Risk blog entitled "Foreclosure Sales and REO for UberNerds" (which contains a further useful link to a website purporting to contain summaries of foreclosure procedures in all 50 states) to see how the Ohio foreclosure sale process differs in several significant ways from that in several other states.

STEP SEVEN - Completing the Foreclosure Sale Process.  (Approximately 4-6 weeks).  Following completion of the foreclosure sale and payment in full of the purchase price by the successful bidder (or bid assignee), a Confirmation Order approving the sale and ordering delivery of the deed to the successful bidder must then be entered by the Court of Common Pleas.

Once the Confirmation Order is entered by the Court, the delinquent mortgagor has no further right of redemption.   Ohio Rev. Code 2923.31 and Ohio Rev. Code 2329.33.  This differs from many other states.  Prior to entry of the Confirmation Order, the mortgagor can redeem the property and in  essence undo the foreclosure sale by paying the amount of the judgment, plus interest on the purchase price at the rate of 8% per annum from the date of deposit.

Again, every foreclosure is different and has its own timetable.  Local procedures vary considerably from county to county in Ohio and from judge to judge.  In addition, unique issues may arise which complicate the process.  However, in general, this is how a typical Ohio foreclosure unfolds when filed in state court.

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Now that the calender has rolled over to 2009, everyone should also be aware that the permissible rate of interest on judgments obtained in Ohio has changed as well.  For new judgments obtained in Ohio courts in 2009 for tort claims or with respect to contracts (including promissory notes and trade accounts) that do not otherwise specify an interest rate, the new rate of interest is ONLY 5%.  This is the lowest it's been since 2005 and quite a drop from the 8% applicable in 2007 and 2008.  For a more detailed explanation of how this number is determined and calculated, visit my previous post "Determining Interest on Ohio Judgments".

Judgments obtained prior to 2009 can continue to accrue interest at the rate specified in the applicable judgment entry.  However, new judgments obtained in 2009 will only accrue interest at 5% even if the permissible rate goes back up in subsequent years.      

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When you're part of the Ohio outpost of a Michigan-based law firm, you get asked questions about Ohio law that you're so used to knowing, it sorta surprises you initially... until you stop and realize there's a whole heckuva lot about Michigan law that you don't know.  Anyway, recently I was asked about foreclosure procedure in Ohio and it occurred to me that in the current economic climate, this might be useful information for lots of folks. 

So, here's a two part post laying out a roadmap for a typical Ohio foreclosure.  Part One covers getting from declaring default to bringing foreclosure proceedings into full swing.  Part Two deals with obtaining the judgment decree in foreclosure once the case is filed, selling the property at sheriff's sale, and the adminstrative details involved in completing the process.  

And of course, my disclaimer: Every foreclosure is unique and presents its own problems and challenges so the following description of the process should be seen only as the most general outline and not relied upon as a detailed explanation of how every forclosure will proceed.  

Whether involved in a foreclosure from the creditor side or as the delinquent mortgagor, everyone always wants to know how long it will take.  And the short answer is longer than you might think.  The length of foreclosure proceedings in Ohio varies considerably from one county to the next and of course every case has its own pace,  However, in my experience, Ohio foreclosures rarely, if ever, take any less than at least six months and often take much longer, not infrequently more than a year.

Initial Observations.  In Ohio, foreclosure proceedings work much the same way regardless of whether the property involved is residential, i.e. someone's home, or commercial/investment.  The most significant difference is that a receiver is often appointed in cases involving commercial investment property to protect the value of the property and the flow of income from occupants in the property.  Because my law practice here in Central Ohio primarily involves representation of creditors with liens on commercial or investment properties, this post will focus primarily on how the process works in those situations.  However, most of what is said is equally applicable to the resdential side as well.  

Ohio, unlike many other states, does not offer creditors the option of a nonjudicial foreclosure, strict foreclosure or deed of sale.  (Click here for a very brief explanation of the difference between judicial and nonjudicial foreclosure.)  If a creditor has a mortgage or judgment lien on real property in Ohio and wishes to convert that lien to cash to pay off the borrower's debt, a lawsuit MUST be filed; there is NO summary procedure or shortcut.  The only out of court alternative available is a "deed-in'lieu" situation in which the borrower voluntarily conveys the real property to the creditor in full or partial satisfaction of the outstanding obligation.  (This could and probably will be the subject of a separate post.)

Because Ohio does enforce cognovit promissory notes evidencing commercial obligations which permit creditors to obtain money judgment immediately upon filing a Complaint, creditors are allowed to pursue post-judgment collection actions with respect to a debtor and its personal property assets during the pendency of the foreclosure proceeding if they have taken a cognovit judgment on the underlying monetary obligation.  Perhaps the most important point here is that a creditor can both take a cognovit judgment and pursue foreclosure simultaneously.

The fact that the titled owner of the real property may be a guarantor rather than a borrower does not affect foreclosure proceedings in any meaningful way.  Nor does the fact that the loan agreement, note, or mortgage is a "hypothecated" obligation or contains "exculpatory" provisions, both of which relieve the signatory of liability in excess of the value of the property pledged, change any aspect of the foreclosure proceedings other than eliminate any attempt to obtain money judgment.

While statutes and court rules governing foreclosure are uniform throughout Ohio, several counties have additional supplementary local rules, many of which fall in the "unwritten" variety, that must be followed by the foreclosing creditor.  Several counties, including Cuyahoga (think Cleveland) and Hamilton (think Cincinnati), use magistrates for foreclosure proceedings.  This can add time to the process because Magistrate Decisions must be adopted by Common Pleas judges before becoming effective.

STEP ONE - Establishing the Event of Default.    (Generally 1 -3 weeks, occasionally 4-5 weeks.) Obviously, an event of default, whether monetary or nonmonetary, must first occur before the foreclosure remedy is appropriate.  Typically, upon default, a demand letter of some sort will be sent to the borrower and any guarantors setting out the amount owed and referencing the occurrence of the default.  Nonmonetary default can include many things, a number of which will likely be spelled out in the applicable loan documents, and can include such things as default on obligations to other creditors, decrease or deterioration in the value of the real property, failure to maintain insurance, or filing of a mechanics' lien upon the real property. 

Before commencing a foreclosure action, lenders must take care to comply with any applicable cure period which allows the borrower to bring the obligation current or otherwise correct the default.  Loans guaranteed by the Small Business Administration, or in which the Veterans' Administration or the Federal Housing Administration is involved may have specific notice periods and guidelines that must be observed before foreclosure should be initiated.   

STEP TWO - Preparing and Filing Foreclosure Complaint.  (Typically 1- 3 weeks, depending on the complexity of the title work required; process can occur contemporaneously with STEP ONE.)  To ensure that all creditors with liens on the real property --  including junior or senior mortgageholders, judgment lien holders, mechanics' lien holders, and taxing authorities -- are properly included as defendants in the foreclosure action, a title report must be ordered from a title company.  It is important to include all such lienholders because if omitted, the lien will remain an encumbrance on the real property even following foreclosure sale, and depending on its priority, might even be entitled to recover proceeds from the foreclsoure sale from other recipients. 

Purusant to Ohio Rev Code 2329.191, the title report or preliminary judicial report (sometimes called PJR, for short), must be filed with the Complaint in the Common Pleas Court in the Ohio county in which the real property is located.  The key is WHERE the property is located; it does not matter if the debtor is a  foreign corporation headquartered in, say Delaware, or if the loan documents were all signed in Michigan, or even if the principal place of business of the debtor is in another county or state. 

Defendants named in the complaint MUST include the follwing:

• Original mortgagor (i.e. party granting the mortgage) - note that this may or may not be the principal borrower and that if not, the principal borrower is not required to be named a defendant
• Current owner of the property, if different from the original mortgagor
• Junior or senior lienholders, including mortgage holders, judgment lien holders, statutory lien holders such as mechanics' liens and others
• Spouse of individual debtor (to eliminate dower rights)
• Current tenants and other occupants, whether there pursuant to written lease or not
• Holders of other interests such as easements, if wish to eliminate them

The Complaint may seek only foreclosure or may also include other counts for such causes of action as money judgments against the borrower(s) and guarantor(s), replevin (i.e.personal property foreclosure - yes, this too will likely eventually be the subject of a separate post), or other related claim.  If a lender has determined appointment of a receiver is warranted, the Complaint will also include a count seeking appointment of a receiver and the lender should have selected a preferred receiver appointee before filing the Complaint.

So this is how a typical Ohio foreclosure generally begins.  In my next post, I'll explain what happens once the foreclosure action is filed and how the process culminates in a sheriff's sale conveying good title to the real estate being foreclosed to another party and providing the source of funds to payall or part of the delinquent debt.

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If you wait long enough, all things old become new again. For a brief four year period over 150 years ago, Ohio had a statutory “commercial court” in which business oriented disputes were resolved. Now a new four-year pilot program will try the idea out again.

New Age of Business Courts

Ohio is among many jurisdictions experimenting with the concept of specialized courts for “business” disputes. One of the driving forces behind this trend seems to be the impression/assumption that having such a specialized court is instrumental in attracting and retaining businesses to a state.  This article about New Hampshire's recent jump on to the business court bandwagon gives you the flavor of this sentiment. 

The 200-year-old Delaware Court of Chancery is of course the grand-daddy of them all. However, Chicago, Manhattan, and North Carolina have had such courts for more than a decade and Rhode Island, Massachusetts, Las Vegas, Reno, Atlanta, Boston, and Pittsburgh have also instituted business courts in some form. Most recently Maine and South Carolina have implemented programs. Colorado and Michigan are currently giving serious consideration to the possibility.  For more information, visit the following:

• Terrific (!!!)  Mississippi Secretary of State Policy and Research Division June 2008 summary/survey of business courts throughout the United States and other resources, including this useful executive summary 
• Central Florida Complex Business Litigation Courts
• North Carolina Business Court
• Maine Business and Consumer Court
• 2005 University of Maryland School of Law survey of existing business and technology courts

Lee Applebaum has penned a very informative article published in the March/April 2008 issue of the American Bar Association’s Business Law Today magazine entitled “The ‘New’ Business Courts: Responding to Modern Business and Commercial Disputes” which provides an excellent overview of the new trend towards specialized business courts. As Lee explains, the new “business” courts tend to have jurisdiction extending beyond the traditional equity jurisdiction exercised by the Delaware Court of Chancery. In addition to the variety of procedural approaches various jurisdictions have taken in establishing “business” courts and/or “commercial dockets”, the scope of cases accepted differs from one court to another.  

• The same issue also has a number of other articles focusing on business/commercial and other specialized courts, both in the U.S. and elsewhere in the world.

Ohio's New  "Business" Courts 

About a year ago, Ohio Chief Justice Thomas Moyer appointed a Task Force to study the best method for establishing commercial litigation dockets in Ohio’s trial courts.  The Ohio Supreme Court has now approved a pilot program permitting Common Pleas Courts in five counties to voluntarily institute business courts pursuant to new temporary rules 1.01 to 1.11 of the Rules of Superintendence of the Courts. Carolyn Kobus, a law clerk at my law firm this summer, prepared an excellent summary of these rules.

Business First (which continues to persist in  requiring paid access to its archives) gave this update as to Ohio generally and Hamilton County in particular.  Hamilton County has already moved forward with the plan and Franklin County is currently considering how to implement business courts. The Ohio Supreme Court's Temp. Sup R. 1.03 sets out the sorts of cases that will be accepted; they are:

1. formation, governance, dissolution, or liquidation of a business entity
2. rights or obligations between or among the owners, shareholders, partners, or members of a business entity, or rights and obligations between or among any of them and the entity
3. Trade secret, non-disclosure, non-compete, or employment agreements involving a business entity and an owner, sole proprietor, shareholder, partner, or member thereof
4. rights, obligations, liability, or indemnity of an officer, director, manager, trustee, partner, or member of a business entity owed to or from the business entity
5. Disputes between or among two or more business entities or individuals as to their business or investment activities relating to contracts, transactions, or relationships between or among them, including without limitation the following:

• Transactions governed by the uniform commercial code, except for consumer product liability claims
• purchase, sale, lease, or license of, or a security interest in, or the infringement or misappropriation of, patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property;
• purchase or sale of a business entity or the assets of a business entity;
• sale of goods or services by a business entity to a business entity
• Non-consumer bank or brokerage accounts, including loan, deposit, cash management, and investment accounts
• Surety bonds and suretyship or guarantee obligations of individuals given in connection with business transactions;
• purchase, sale, lease, or license of, or a security interest in, commercial property, whether tangible, intangible personal, or real property
• Franchise or dealer relationships
• Business related torts
• Cases under antitrust laws;
•  Cases relating to securities, or relating to or arising under federal or state securities laws
• Commercial insurance contracts, including coverage disputes.

There is also a specific list of cases which the “business” court will not hear; these are:

• Personal injury, survivor, or wrongful death matters
• Consumer claims against business entities or insurers of business entities, including product liability and personal injury cases, and cases arising under federal or state consumer protection laws;
• occupational health or safety, wages or hours, workers’ compensation, or unemployment compensation
• occupational health or safety, wages or hours, workers’ compensation, or unemployment compensation
• Matters in eminent domain;
• Employment law cases
• Cases in which a labor organization is a party
• Cases in which a governmental entity is a party
• Discrimination cases based upon the United States constitution, the Ohio constitution, or the applicable statutes, rules, regulations, or ordinances of the United States, the state, or a political subdivision of the state;
•  Administrative agency, tax, zoning, and other appeals;
•  Petition actions in the nature of a change of name of an  individual, mental health act, guardianship, or government election matters
•  Individual residential real estate disputes, including foreclosure actions, or non-commercial landlord-tenant disputes
• domestic relations, juvenile, or probate division of the court
• jurisdiction of a municipal court, county court, mayor’s court, small claims division of a municipal court or county court, or any matter required by statute or other law to be heard in some other court or division of a court
• Any criminal matter, other than criminal contempt in connection with a matter pending on the commercial docket of the court

Will Ohio's Business Courts Work?

One weakness I see in the pilot program is the assignment procedure for getting the case to a “commercial docket judge.” It relies upon the attorneys involved in the case to file appropriate motions to have the case transferred, and if they fail to do so, by the judge presiding over the case. To me it seems like it would have been a whole lot easier to have the case designated as a “commercial” case when filed and routed directly to the appropriate judge from there. In Franklin County, cases such as foreclosure, professional tort, and other particular sorts of cases are already separately designated by specific letter abbreviations included in the case number they are given. 

In addition, while the temporary rule requires a ruling on the transfer motion with two days, as well as decisions on other motions within 60 days, I’m a bit skeptical as to how often that will actually happen in reality.  

On balance, however, I support the concept of “business” courts. Throughout most of my career much of my litigation experience has occurred in federal bankruptcy court. I have always appreciated the fact that you could proceed to deal with the particular issue involved rather than having to begin each time by educating the judge as to the entire philosophical and structural framework of applicable law.  

In addition, over time, as a “regular” down at bankruptcy court, attorneys come to understand the likely range of results emanating from particular recurring fact patterns. This allows attorney to offer better counsel and advice to clients as to the relative merits of settling or pushing forward with the case. That in turn promotes judicial economy as more cases are resolved by the parties now that they have greater certainty as to possible outcomes.

I hope that the Franklin County Common Pleas judges agree to participate in the pilot program.

UPDATE: The Daily Reporter, the daily legal newspaper in Columbus, reports that Franklin County judges will join Hamilton County in a pilot commercial docket program.  Cuyahoga County, where Cleveland is located, is also expected to approve participation in the pilot program.  The pilot program is supposed to be implemented by early 2009 and would remain in effect through July1, 2012.

UPDATE: The University of Maryland School of Law Journal of Business and Technology's website has an up to date  summary of  Recent Developments in State Business and Technology Courts which briefly explains the status in more than twenty states and also has some interesting recent news briefs.  (Hat tip to Rush Nigut of Rush on Business for this link.)

UPDATE:  The Cuyahoga Common Pleas Court is now on board for the pilot program.  Check out this informative Q & A on business courts appearing in The Cleveland Plain Dealer. 

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Now that I've been doing this law blog thing for about eight months, I've had a chance to get acquainted with my neighbors in the blogosphere.  There are of course my subject matter compatriots all across the country that I've enjoyed coming to know through their blogs (Chris Moander of the relatively new Wisconsin Business Law and Litigation blog and Rush Nigut of Rush on Business from Iowa (the home in my youth) especially come to mind).  But today I wanted to focus on my geographically proximate neighbors practicing law in Ohio while writing their blogs.  

Like anyone else I have my favorites.  I don't claim to be any arbiter of quality or worth so the following is really nothing more than what I've found I've liked the most so far. 

Perhaps my own personal favorite Ohio-based blog is The Briefcase which has been published by solo practitioner Russ Bensing for quite a while.   It promises to provide "commentary and analysis of Ohio law" and it certainly delivers.  Russ gives brief summaries and case updates of Ohio civil and criminal cases decided by the various Court of Appeals and the Ohio Supreme Court with a bit more criminal than civil cases.  While this is of course useful, his regular "Friday Roundup" feature focusing on the more entertaining legal cases out there is a must-read for me every week.  In addition, even the case updates and summaries are given with a definite bit of "attitude" that makes them much more interesting than the usual dry case summary.  And his "About" section is particularly well done.  Russ's stuff is not often the sort of thing I tend to link to (which may say more about me than him), but I certainly appreciate his contributions.

My other "substantive" favorite  Ohio-based blog is the Ohio Employer's Law Blog published by Jon Hyman of Kohrman, Jackson & Krantz  for more than a year.  Its tagline is  "Practical employment law information for businesses in Ohio and beyond."  What I like about this blog is Jon's well written, informative, and useful (even "practical") posts about important issues in the labor and employment law areas.  I also think Jon's analysis of the legal issues he covers is clear and seems right on point.  In addition, I like his regular "What I'm Rreading" series which features several quick links to other interesting posts around the blogosphere.  I don't practice in this area so I appreciate having such excellent resource available to keep me up to date about pertinent legal developments. 

Ohio Employer's Law Blog is one of two Ohio-based blogs focusing on employment and labor issues.  The other is Porter, Wright, Morris & Arthur's Employer Law Report which says it will be "Reporting on recent legal developments and trends affecting employers".  It has been published sporadically over the last couple of years, but now seems to be adding new worthwhile posts more frequently. 

The D&O Diary published by Kevin M. LaCroix of Oakbridge Insurance Services, an insurance intermediary focused exclusively on management liability issues, focuses on perhaps the most complex issues of any Ohio-based law blog.  It is intended to be "A Periodic Journal Containing Items of Interest from the World of Directors and Officers Liability, with Occasional Commentary".  I haven't had much chance to become fully acquainted with this blog yet, but hope to so in the near future.

When it comes to coverage of both substantive and professional developments of interest to Ohio lawyers, I like the Cleveland Law Library Weblog the best.  It explains that "our goal is to inform local attorneys of major legal developments important to their practice".    I often find ideas for posts by reading this blog and appreciate the links usually provided.  The Cincinnati Law Library Blog  and the Moritz Legal Information Blog which provides "Legal Information and Research Resources Brought to You by The Michael E. Moritz Law Library at The Ohio State University" also provide these sort of services.

One of the newest Ohio-based law blogs is the Ohio Real Estate Blog published by the attorneys of the Real Estate Practice Group of Kohrman, Jackson & Krantz which started up only a couple of months ago in April.  In same real estate practice area is the Build on This! blog published by the attorneys of the Real Estate and Construction Practice Group of Buckingham, Doolittle & Burroughs, LLP which offers "Current news, information, and events affecting the real estate, construction and land use industry and its professionals".

Another recent addition to the blogosphere is the Reasonable Doubts blog published by Jeffrey Davis.  It started in March 2008 and, as its name would suggest, focuses on crminal law.  In addition, the Ohio Family Law Blog, published by Robert Mues of Holzfaster, Cecil, McKnight & Mues, LPA, began in December 2007 and tries to provide "Family Law and Divorce Information for Ohio Families Seeking Solutions".

Interestingly, there are TWO Ohio based law blogs called Sixth Circuit Blog.  One seems to focus on criminal law and offers "Case summaries and commentaries by federal defenders of the Sixth Circuit".  The other, published more sporadically by Eric Zagrans, focuses primarily on civil law and is "Devoted to Appellate Law and Practice Within the Sixth Circuit and Its Constituent States"

Rounding out the roster of Ohio-based law blogs (at least those I'm aware of) are the following with which I am less familar, in part because they relate to areas of law with which I have less experience in my day to day practice:

• The Ohio Trust and Estate Blog published by Michael D. Bonasera of Buckingham, Doolittle & Burroughs, LLP
• Tsibouris & Associates Law Blog published by the attorneys at Tsibouris & Associates 
• Consumer Rights Law Blog published by Ron Burdge  and focusing on "Motor Vehicle Lemon Law, Consumer Protection Law, Car Law, News, Notes, Issues, and Updates"

While there are several newer Ohio based law blogs, there are also many that have been published for two or three years or even longer.  There are also some earlier Ohio-based blogs that are no longer publishing.  In addition, there are several "business" blogs based in Ohio that touch on legal issues from time to time, but that's a subject for another day.

I hope I haven't forgotten anyone, but if I have, just add a comment with your URL and then we'll know about you too. 

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From the comfort and convenience of my office computer this morning, I watched the oral argument before the Ohio Supreme Court in Dombroski v. Wellpoint, Case No. 2007-2162.  In this case. the Court was asked to answer the question "when may a tort plaintiff pierce the corporate veil to pursue recovery from a "parent" corporation".  The Court allowed both sides substantially more than the allotted 15 minutes each, asking both attorneys numerous questions. 

• As an aside I want to mention how wonderful it is to be able to see Ohio Supreme Court oral argument without the hassles of parking and transportation. The Ohio Supreme Court has been doing this since early 2004. but this was my first experience utilizing the option. Not only did I save the time coming and going (in pouring rain today I might add), I tuned in a little early and was able to work on other matters right up to the minute oral argument began. The picture is clear and shows close-ups of the attorneys and Justices as they speak. The sound quality is terrific. In many respects, this was actually better than going in person.  You can still see the oral argument by going to the video archives.
• I have a case coming up shortly before the Ohio Supreme Court which does involve the corporate veil piercing issue. So I suppose I'm just a little more interested than I otherwise would be, even though at the moment we're only up on a preliminary procedural issue. (If I don't win on that, we'll be back on the corporate veil piercing issue later.)

Suzanne Richards of Vorys, Sater, Seymore & Pease argued on behalf of the defendant-appellant "parent" company shareholder against which plaintiff-appellee Dombroski seeks recovery.  Robert Palmer appeared on behalf of Ms. Dombroski.  Both attorneys were extremely well prepared.  Although the Ohio Council of Retail Merchants, Ohio Chamber of Commerce,  the Ohio Chapter of the National Federation of Independent Business, and the Ohio Farm Bureau Federation jointly submitted an amici curaie brief in support of the defendant parent company, they did not participate in the oral argument.

Factual and Procedural Background.  In a nutshell, the most salient facts are that Ms. Dombroski was denied insurance coverage for a procedure deemed "experimental".    Ms. Dombroski had a health insurance policy issued by defendant Community Insurance Company ("CIC") which utilized Anthem  UM Services, Inc. ("AUMS") to administer its policies and process claims.  Still another company, Anthem Insurance Companies, Inc.  ("AICI") defined the scope of the coverages under CIC policies.  CIC, AUMS, and AICI were all subsidiaries of  defendant Wellpoint, Inc. ("Wellpoint").  Coverage was apparently denied as a result of a blanket policy by defendant AICI.  Dombroski sued everyone for bad faith denial of her claim.  Counsel for Ms. Dombroski conceded that undercapitalization was not an issue.

AICI and Wellpoint filed motions to dismiss each of them as a party defendant on the grounds that the contract was with CIC and not with them and there was no grounds for bypassing the corporate entities.  The trial court agreed, but the Seventh Appellate District Court of Appeals reversed, holding that the second prong of the Belvedere test could be satisfied through the showing of an "unjust" or "inequitable" act even if it did not rise to level of fraud or illegality  On appeal, the proper interpretation of Belvedere for determining when it is appropriate to pierce the corporate veil was certified because of a conflict among the Courts of Appeal.

Oral Argument Synopsis.  All of this is a very long introduction to the oral argument itself.  Counsel for Wellpoint emphasized that the second prong of  Belvedere required the parent company/shareholder to have "perpetrated a second wrong" by deliberately destroying the ability of the defendant subsidiary to satisfy any judgment against it.  Counsel for Ms. Dombroski emphasized that "piercing the corporate veil" is an "equitable argument" and that insurance bad faith claims are "fairness torts".  He also emphasized thhat Wellpoint set corporate policy for the subsidiaries.  Several of the Justices seemed to have difficulty understanding the complete corporate structure and a couple asked if perhaps the case was not yet ripe for determination.

Justice Pfeifer suggested that perhaps the Court didn't think all that carefully about  the test formulated in Belvedere because the veil piercing was a relatively small part of that case and that the whole test should be re-evaluated.  Later in the oral argument, he posed the question of what would happen if and when the plaintiff tried to depose the nonparty parent regarding the establishment of the policy leading to the denial of coverage.

Chief Justice Moyer suggested that, although the question certified was the proper interpretation of Belvedere, the case could actually be decided on much narrower grounds.  He posited that if a medical insurance company sets up a subsidiary with the purpose of hindering recovery by plaintiffs, that would be "illegal" and easily fall within all interpretations of Belvedere's second prong.  Justice Lanzinger later asked a similar question.

Justice Stratton seemed to think (and I tend to agree) that Dombroski should have an adequate direct claim against CIC and consequently no veil piercing argument was necessary.  Justice O'Connor was concerned that focusing on whether an "unjust" or "inequitable" act might "open the floodgates" for litigation in this area; she indicated that she felt that there had to be "some level of dishonesty"  before recovery could be had.      

My Thoughts.  I tend to agree that more must be proven than just that there was an "unjust" or "inequitable" act perpetrated on the plaintiff to justify piercing the corporate value.  Otherwise the three prong test of Belvedere is really collapsed into a single inquiry.  I also think that sometimes the world is not fair and people who really don't deserve it suffer misfortune; I don't think that someone else should be held responsible for this occurrence in every case.

At the same time, I am not altogether sure that the more stringent test really helps the defendant "parent" company in this particular instance.  It does seem to me that the multiplicity of subsidiaries may well have been set up to thwart policyholders seeking to challenge denial of coverage.  To the extent that is true, I think the parent company may have abused the underlying  conceptual policies of limited liability and should be denied the benefits of that legal doctrine as a consequence.

I am also concerned, however, as to what effect a more "flexible" standard for determining when piercing the corporate veil is permissible would have on closely held companies with a limited number of individuals as equity owners.  Here, especially, something more sinister than suffering by the plaintiff ought to be required.  If that is all that is necessary, then every complaint should include a count seeking the piercing of the corporate veil.  Almost by definition, if there is any actionable claim at all, it is because something "unjust" or "inequitable" happened to the plaintiff.

Perhaps the answer is to introduce further confusion by bifurcating the standards for piercing the corporate veil, having one applicable only to closely held entities, or at least to imposing personal liability against individuals, while the other is applicable only to more sophisticated transactions.

Oh yeah - how do I want it to come out to help my case?  I like the Belvedere standard just as it is, thank you, and wouldn't mind if you made it even more restrictive.

For more on the piercing the corporate veil concept and Belvedere, read my previous post on Piercing the Corporate Veil- What It Means and How to Avoid It. 

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Everyone hates insurance companies, especially when they deny individual policyholders coverage for medical treatment.  But does that mean that corporate formalities should be ignored to permit the unfortunate policyholder to bring an action against the parent company of the subsidiary denying coverage on the grounds of a bad faith breach of the insurance policy contract?  Is it enough if the Court finds that "unjust" or "inequitable" acts have occurred even if they don't rise to the level of fraud or illegal action?  On its face, that is what the Ohio Supreme Court is called upon to decide in Dombroski v. Wellpoint, Inc., et al., Case No. 2007-2162 when  it hears oral argument in the case on Wednesday (June 4, 9 AM, third case on the docket) this week.    

Interpreting Belvedere.  However, the Ohio Supreme Court has taken the opprtunity to resolve a conflict among Ohio Courts of Appeal concerning what is required to"pierce the corporate veil" and impose liability upon a corporation's shareholders or upon the parent company of a corporate subsidiary.  In a January 23, 2008 Entry, the Court ordered the parties to brief the following:

Does the second prong of Belvedere Condominium Unit Owners' Assn. v. R.E. Rourke Cos.. Inc. (1993), 67 Ohio St.3d 274, which states that the corporate veil can be pierced when control of the corporation "was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity" also allow the corporate veil to be pierced in cases where control was exercised to commit unjust or inequitable acts that do not rise to the level of fraud or an illegal act?

The Ohio Supreme Court's Communications Office has prepared a concise summary of the factual and procedural background of the Dombroski case, as well as the specific insurance-related issue presented.  You can see and hear the oral argument from the comfort of your own computer, either live or in the archives as early as close of business on the day of oral argument, through the use of streaming video technology. 

By consulting the Supreme Court's on-line docket, you can also review or download the briefs filed in the case, including an amicus curiae brief filed jointly in support of the appellant-defendant parent company by the Ohio Council of Retail Merchants, Ohio Chamber of Commerce,  the Ohio Chapter of the National Federation of Independent Business, and the Ohio Farm Bureau Federation.  The defendant-appellant's brief has a rather extensive survey of caselaw in Ohio and elsewhere addressing the proper standard for "piercing the corporate veil." 

Deciding What It Takes to "Pierce the Corporate Veil".  The Belvedere decision established a three prong test to be met before a corporate form may be disregarded and shareholders held personally liable for the misdeeds of a corporation, namely:

• Control over the corporation by those to be held liable so complete that the corporation had no separate mind, will or existence of its own.
• Control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity.
• Injury or unjust loss resulted to the person seeking to disregard the corporate entity from such control and wrong.   

Some courts, including the Seventh Appellate District Court of Appeals below in the Dombroski case (173 Ohio App.3d 508, 2007-Ohio-5054, 879 N.E.2d 225), have broadly interpreted Belvedere to include situations in which the corporate form was abused to the detriment of the plaintiff, but no illegal act or intent to defraud could be shown.  These cases include:

• Wiencek v. Atcole Co., Inc. (3d Dist. 1996), 109 Ohio App.3d 240, 671 N.E.2d 1339
• State v. Tri-State Group, Inc. 2004-Ohio-4441 (7^th App. Dist.)
• Stypula v. Chandler,  2003-Ohio-6413 (11^th App. Dist.)
• Sanderson Farms v, Gasbarro, 2004-Ohio-1460 (10th App. Dist.)
• Dalicandro v. Morrison Rd. Dev. Co., Inc., 2001 Ohio App. LEXIS 1765 (10th  App. Dist.)
• Robert A. Saurber Gen. Contractor v. McAndrews 2004-Ohio-6927 (12th App. Dist.)

• Collum v. Perlman, 1999 Ohio App. LEXIS 1938 (6th App. Dist.)
• Widlar v. Young, 2006-Ohio-868 (6th App. Dist.) 
• Nursing Home Group Rehab. Serv., LLC v. Suncrest Health Care, Inc., 162 Ohio App3d 577, 2005-Ohio-3945
• Siva v. 1138 LLC, 2007-Ohio-4677 (10th App. Dist.)

What Should the Standard Be?  Many of the cases involving "piercing the corporate veil" focus on smaller privately held corporations in which the individuals constituting the shareholders have not adequately capitalized the business enterprise, commingled corporate and personal funds, or otherwise ignored corporate formalities.  In these cases, it is fairly easy to reach the conclusion that the corporate form should be disregarded.

The Domboroski case presents a more difficult situation.  As explained in plaintiff Dombroski's brief:

The facts in Dombroski present the challenge of how the doctrine of piercing the corporate veil is to be applied in the realtiy of today's insurance organizations, which frequently includes a parent corporation that does business through many subsidiaries.... Multi-state insurers, such as WellPoint or "nthem", which run its insurance business through affiliates while utilizing an integrated and centralized web of policies and procedures seek to return to the "good old days" when they were free to refuse or pay claims - for good reasons, for bad reasons, for no reason at all - safe in the knowledge that regardless of the unjust resulta their decisions bring to their insured....

However, I agree with the appellant parent company and amici curiae that encouraging the expansive view of "piercing the corporate veil" advocated by plaintiff Dombroski is likely to result in shareholders, particularly in closely held companies, being added as defendants virtually anytime the company itself is sued.  As the amici curiae  brief puts it:

If the opinion below is upheld by this Court, shareholders of Ohio corporations would face being haled into court and held personally liable whenever a tort claim is asserted against the corporation, or the corporation is alleged to have violated a regulatory statute, or the corporation is portrayed as having engaged in conduct that is characterized by the plaintiff as "unjust or inequitable."  Such a result would have devastating consequences for the concept of limited shareholder liability and for the ability of small business owners to use the corporate form as a successful engine for economic growth, jpb creation, and social progress.   

The defendant-appellant parent company's brief makes the further point that:

Because it jettisons the most salient factor of proper veil-piercing analysis - that the shareholders must misuse the corporate form to perpetrate a fraud or an illegal act - the appellate court's interpretation will make veil piercing more common. That result, in turn, would make it less likely that entrepreneurs will form corporations and that investors, large and small, will invest in those corporations as they conduct business activities and help the economy to grow.

My concern here is that the desire to rein in insurance companies, and what some might perceive as their arrogance, will result in "bad law" being established in this area.  While it might seem attractive under the facts of this case to be less insistent upon requiring a demonstration of fraudulent or illegal intent, the result will certainly give both large and small businesses pause.  If the focus of the "piercing of the corporate veil" analysis shifts from the actions and motivations of the company's owners to the nature of the plaintiff's loss, the utility of the corporate form will become much less for businesses.  Ohio's business climate will be viewed even less favorably.

It will be interesting to see how this case unfolds.   

For more on the piercing the corporate veil concept and Belvedere, read my previous post on Piercing the Corporate Veil- What It Means and How to Avoid It. 

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Your business supplies a service or product to a customer and then bills the customer.  One month goes by, then two, and you hear nothing from the customer - no payment, no complaint, no explanation.  By the third month, you are probably becoming rather irritated at the very least and depending on how things are going financially, may be getting a bit concerned.  Or perhaps you've called the customer only to receive a series of excuses and promises that payment will soon be forthcoming.  What do you do?

Chris Moander of the Wisconsin Business Law and Litigation blog has been making a series of posts about how and when to make the decision to go to court to collect these sort of delinquent accounts.  My favorite, with the attention-getting title of "Would lower legal bills motivate you to organize your files?", explains what sort of information and records are helpful to your attorney when you turn the account over ro him or her for collection.  

What to Give Your Attorney.  I agree with everything on Chris' list and with his general point that the more organized information you can give your attorney about a delinquent account, the more quickly -- and inexpensively -- things can move forward.  While all of the items mentioned by Chris are certainly helpful, here's my list of what I find especially useful when I am asked to file a lawsuit against a customer who hasn't paid as agreed:

• Basic contact information (i.e.name, address, phone) of customer
• Credit application, purchase order, or contract documenting the purchase
• Invoice
• Ledger or account history for at least the last 3-4 months
• Copy of any checks previously sent by the customer (or information about the bank used by the customer)
• Any correspondence (including e-mails) exchanged (i.e. sent to, or received from) the customer relevant to the outstanding debt
• Any pertinent information about general nature or length of the relationship with the customer, i.e. was it generally good before this or has this customer always been difficult, is this a huge part of your revenues

With this information, I can get a fairly good idea of what the best approach might be and have what I need to file a lawsuit.  Getting it on the front end saves both time and money.

Why Collect?  Chris also addresses the question "Why collect?", and in another post entitled "Time to call Mr. Wolf", provides some guidelines concerning when it might be time to turn the matter over to your lawyer.  Again I agree wholeheartedly with Chris, but let me add some additional thoughts.  As far as the "why", that much seems rather self-evident.  Unfortunately, the world is not a perfect place and not everyone voluntarily does what they should.  If you're not willing to force the issue of payment when appropriate from time to time, it won't be long before you find you're not making any money and may have to go out of business altogether.

Deciding When to Pursue Legal Action.  Knowing "when" to pursue payment through legal channels and "when" it might be helpful to turn the matter over to your attorney is more complicated.  As Chris suggests, if any of the following are true, it probably is time to "go legal":

• The account is 90 days past due, and in some cases, even sooner.  If you wait too long to pursue legal action, events and circumstances may have occurred in the interim which make the legal option less effective
• Suddenly there's a "problem" with the product or service sold or the customer now has some other dispute with you and the customer wants some or all of their money back.  Of course in many cases, it makes good business sense to just go along with the customer and give a discount.  However, make sure you are doing that in appropriate cases.
• You've endured a series of excuses and broken promises that payment is right around the corner.

There are also times when it probably doesn't make sense to play the "legal" card:

• If there really was a problem or defect in the service or product, even if it wasn't near as big a deal as the customer is now making it
• The amount at stake is relatively small (or relatively small in comparison to the complexity of the situation resulting in nonpayment - read, lots of legal fees to sort through the facts and counter-allegations)  
• You have very important noneconomic reasons for wanting to avoid a dispute - perhaps it's your wife's brother's business
• Someone in your company engaged in some sort of objectionable behavior or made what could be characterized as misleading statements to the customer about any aspect of the business relationship between you (e.g. one of your sales people said somethingto the customer about waiting for the customer to get back on their feet before pressing for payment)
• There's virtually no chance the customer has any money or assets available to pay any judgment obtained

Thus knowing "when" it's time to pursue legal action is a case by case decision.  Often the choice will not be clear-cut. 

Once you've made the decision to pursue legal action, if the debt is small, you may still be able to handle it without the intervention of a lawyer if you really want to do so.  In Columbus where I live and practice law, and elsewhere throughout Ohio (and probably in other states as well), there are "Small Claims Courts".  In Ohio, these courts only have jurisdiction to hear matters involving $3,000 or less.  In addition, while it is possible for an officer or employee of the company to handle the case on behalf of the company without an attorney, he or she may only present documents such as invoices and testify only about facts of his or her own personal knowledge; no questioning or cross-examination of the customer's witnesses is permitted.  The Small Claims Division of the Franklin County, Ohio Municipal Court has prepared a very useful synopsis of how this court works.

If you decide to consult an attorney, that does not necessarily mean there has to be a lawsuit.  Often a letter from your attorney can prompt a response from the customer and it will be possible to work out a payment plan or other resolution of the matter.  An attorney can also help you make the determination whether pursuing collection makes sense in a particular case.

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So you've decided to "get with it" and enter the 21st century in your marketing and business development efforts?  You're really going to do it - harnessing the power and magic of the internet and e-mail marketing!  GREAT!  But did you know that there are some legal pitfalls waiting to trip you up if you fail to do it correctly?

And failing to do it right CAN cost you - BIG TIME!  Recently, at the request of the Federal Trade Commission (FTC), a federal judge in Chicago, Illinois ordered Sili Neutraceuticals, LLC and Brian McDaid to pay more than $2.5 MILLION for making false advertising claims and sending illegal e-mail messages in violation of the FTC  Act and the CAN-SPAM Act.  Why?  Well, according to the FTC  Press Release, among other reasons, the commercial e-mail messages being sent

• had misleading subject headings
• failed to provide clear and conspicuous notice of the opportunity to decline receiving any further e-mails from the sender
• failed to provide  a functioning return e-mail address
• failed to include the sender's valid physical postal address 

Nor is this simply an isolated incident or a problem only for inexperienced or small businesses.  FTC also recently settled with Cyperheat, Inc. regarding the behavior of its downstream affiliates, imposing significant monitoring responsibilities on Cybernet, Inc.  For a summary of the responsibilities being imposed and suggestions on how to avoid trouble, visit "Affiliates: What is a Company's Responsibility?" post on Laura Adkins'  Word to the Wise blog.

What CAN-SPAM Is All About.  So what, exactly, is this CAN-SPAM Act and how can you make sure you don't accidentally run afoul of its requirements, exposing yourself to unwanted possible liability and interference with the operation of your business?

• The CAN-SPAM Act is  the Controlling the Assault of Non-Solicited Pornography  And Marketing Act of 2003.  Its purpose is to authorize the FTC to enforce the first national standards for sending commercial e-mail, and to limit the bulk sending of e-mail.

• On its website, the FTC provides an excellent summary concerning "The CAN-SPAM Act: Requirements for Commercial Emailers" which highlights the major requirements of the CAN-SPAM Act, as well as the penalties for non-compliance and "Remove Me" Responses and Responsibilities: E-mail Marketers Must Honor 'Unsubsribe' Claims" which gives specific guidance concerning responsibilities of businesses using e-mail marketing techniques.   

Scope of CAN-SPAM Act.  The CAN-SPAM Act differentiates between "commercial" and "transactional" messages.  Thus, messages that are primarily invoicing or related to account information are not subject to CAN-SPAM.  You can even include some advertising content as long as it occupies a non-prominent postion.  (Some may wonder if it's even worth the effort to do this, especially since including any advertising arguably exposes you to at least some risk of liability.)  Rule of Thumb - if you're sending exactly the same message to lots of customers or clients (or potential customers or clients), CAN-SPAM probably applies. 

Religous or political messages are exempt.  Also, at least to some extent, messages to existing customers or others who have affirmatively inquired about your goods or services may also be exempt.

The Bottom Line: What You Really Want to Know.  If you're like most business owners, all you really want to know is what - exactly - you have to do to be safe.  Obviously, to be sure you have properly complied, you should consult legal counsel to advise you about your particular situation.  However, here is some very GENERAL guidance:

• Unsubscribe Compliance.  Recipients of your e-mail  MUST  have an effective option to unsubscribe and you must comply within 10 days (or if at all possible, sooner).  You should also keep a list of folks whose "unsubscribe" requests you have honored so you can demonstrate compliance if necessary.  In addition, once someone has unsubscribed, you can't legally sell or transfer that person's e-mail address or other information. 

• Content.  Be SURE to accurately reflect yourself as sender and don't get too cute with the subject lines; accurate and proper descriptions are essential.  In addition, you MUST include your physical postal address within the body of the e-mail.  (It's probably not a bad idea to also include the main phone number for your business.)  While providing a link to your company website might satisfy the address requirements, why take the chance?  Finally, if your company is involved in the distribution, production, or other connection, with or of "adult content", you MUST so label it. 

• Sending Behavior.  Don't send messages with false headers, through open relays, or which contain a harvested e-mail addresses.

Other Points to Keep in Mind.  If you promise refunds to dissatisfied curtomers, make certain you deliver.  Identify your e-mail, or otherwise make sure it can be identified, as an advertisement.  Remember that even seemingly innocuous correspondence such as notifications of "seminars", "open houses", or "receptions" can still fall within the orbit of CAN-SPAM.   

What Can Happen If You Mess Up.  Each violation (and every single e-mail sent can be considered a separate violation) is subject to fines of up to $11,000.00 (so if you sent the same e-mail to 10 people, that could potentially be a $110,000 fine).  Additional penalties, including criminal prosecution and imprisonment, are also a possibility under certain conditions.  So you kinda want not to mess up on this.

BOTTOM LINE (Practical Legal Counsel): It's just not that hard to make sure you're doing it right so why take the risk?  If you pay attention and make the effort, you can virtually eliminate this potential liability.  If you don't, it really could be the end of your business.  And, of course, good legal counsel can help make sure you're addressing this concern effectively.   

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The ongoing C.V. Perry receivership case reflects an interesting choice of state law insolvency procedures over federal bankruptcy proceedings. And yet, no doubt in part due to the sparseness of developed case law and statutory authority when it comes to Ohio receivership law, much has been borrowed from federal bankruptcy law.

As a Columbus bankruptcy attorney who often represents creditors, I find the C.V. Perry case quite interesting because the procedures and law that will be established during the course of this case are likely to have an impact for some years to come. If nothing else, Franklin County at least will have a roadmap for others contemplating receivership to follow.

A few months ago I wrote about how the C.V. Perry receivership was representative on what I saw as a mini-trend in choosing state court receivership over federal bankruptcy and some reasons that might be happening. In my last post, I provided more detailed information about the C.V. Perry receivership itself. In this post, I want to discuss some more of the events in the case and how the influence of federal bankruptcy law can be seen.

Proof of Claim Procedure. Although Ohio Rev. Code 1701.89(A) does refer to the "presentation and proof of all claims and demands against the corporation", the actual process to be followed is left rather vague. Moreover, there is no analogous provision in Chapter 1705 of the Ohio Revised Code applicable to limited liability companies. Under federal bankruptcy law, requiring creditors to make a written "proof of claim" is a key component to the administration of any bankruptcy case and Bankruptcy Rule 3002 and Bankruptcy Rule 3003 sets out exactly how and when this should be done.

Injunctive Relief in Form of a "Stay". Count VII of the Complaint seeks unspecified injunctive relief. However, the Amended Order goes further and in language very similar to section 362 of the Bankruptcy Code, provides:

IT IS FURTHER ORDERED that all creditors, claimants, bodies politic, parties in interest, and all sheriffs, marshalls, and other officers, and their respective attorneys, servants, agents, and employees, and all other persons, firms and corporations be, and they hereby are, jointly and severally, enjoined and stayed from commencing or continuing any action at law or suit or proceeding in equity to foreclose any lien or enforce any claim against any of the Movants or their respective property, or against Martin Management, as receiver and liquidating trustee, in any court. All such entities are further stayed from executing or issuing or causing the execution or issuance out of any Court of any writ, process, summons, attachment, subpoena, replevin, execution, or other process for the purpose of impounding or taking possession of or interfering with, or enforcing any claim or lien upon any property owned by or in possession of Martin Management, as receiver and liquidating trustee, and from doing any act or thing whatsoever to interfere with Martin Management, as receiver and liquidating trustee, in the discharge of its duties in this proceeding with the exclusive jurisdiction of this Court over Movants' properties and said receiver and liquidating trustee. This Order shall be in full force and effect as of the date of its journalization with the Clerk of Court.

Creditors have also responded in a fashion similar to what they would do in a bankruptcy proceeding. One even entitled its pleading "Motion for Relief from Stay".

My point here is that ordinarily in cases in which injunctive relief is granted outside bankruptcy, the procedure is somewhat different than what seems to be happening in this case. Typically an interim temporary restraining order is first imposed for a limited period of time followed, generally after some kind of hearing or by agreement of the parties, by a preliminary injunction. Parties wanting the injunction removed usually ask that it be dissolved, not that the "stay" be lifted. Here, there is no indication that any hearing was ever held prior to the issuance of this Order.

What makes the issuance and continuance of that portion of the order appointing the receiver/liquidating trustee particularly interesting is that, as some creditors have pointed out, statutory authority doesn't really support such a blanket imposition of a stay. While Ohio Rev. Code 1701.89(A)(2) does allow the imposition of a "stay of the prosecution of any proceeding against the corporation or involving any of its property", Ohio Rev. Code 1705.45(B)(2) specifically states that "dissolution of a limited liability company does not... prevent the commencement of a proceeding by or against the company in its name..."

"Administrative Priority". One especially interesting concept borrowed from bankruptcy practice is the recognition of "administrative priorty" for certain claims. An intial Borrowing Order entered in late December authorizes the Receiver/Liquidating Trustee to borrow funds or purchase materials up to an aggregate amount of $5 million. It also provides that those extending credit in this way "shall be entitled to administrative priority distribution" for those amounts.

More recently in February, the Receiver/Liquidating Trustee filed a Motion for Authorization to Establish Fund for Administrative Fees, Costs and Operating Expenses which essentially seeks to surcharge creditors with liens on real estate to pay fees for the Receiver/Liquidating Trustee and his counsel, as well as other administrative expenses. Creditors have opposed this latest motion and some have pointed out that in a Chapter 7 bankruptcy proceeding, attorneys' fees and other administrative priority claims are only paid out of the disposition of unencumbered assets.

The concept of "administrative priority" is a bankruptcy one spelled out in section 503 of the Bankruptcy Code. There is no comparable provision in the Ohio Revised Code. Here again, the sparseness of statutory authority and relative staleness of caselaw (most cases cited by any party are more than 50 years old and some date back before 1900) has led to importation of bankruptcy concepts into a state law insolvency proceeding.

The paucity of recent or extensive authority concerning receiverships in Ohio law has been both the advantage and drawback of choosing receivership over the more clearly delineated Chapter 7 bankruptcy proceeding. At the conclusion of the C.V. Perry case, that will no longer be true. As the case proceeds, it will be interesting to see the extent to which bankruptcy concepts and procedures are imported.

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In connection with the downfall of the C.V. Perry homebuilder entities, I have previously posted on the increasing use of receivership in place of bankruptcy. It's been a few months since then and perhaps time for an update, as well as some commentary.

This is the first of a two-part series concerning events in the case itself and some reflections on what it all means. In this post, I want to provide some more detailed information about the case, some of its players, and the context in which it is happening. In Part II, I will explore the influence of federal bankruptcy law in the case.

Parties. First, more info on the basics. The C.V. Perry receivership actually involves multiple related entities, consisting of limited liability companies in which C.V. Perry & Co. was the sole member. In addition to C.V. Perry & Co., the receivership case also includes the judicial administration and winding up of the following entities (collectively, along with C.V. Perry & Co., I'll refer to as "Perry Entities"):

• C.V. Perry Builders, LLC
• C.V. Builders II, LLC
• Manors at Homestead, LLC
• Pointe at Blacklick, LLC
• Manors at CrossCreeks, LLC
• C.V. Land II, LLC
• Arlington Remodeling, LLC

Martin Management Services, Inc., through its principal Reg Martin is the court appointed "Receiver and Liquidating Trustee" (more on what this means below) and is represented by the law firm of Strip, Hoppers, Leithart, McGrath & Terlecky Co., LPA. Judge John F. Bender is presiding.

Following Case Progress. Anyone wanting to follow this case closely can visit the Franklin County Clerk of Court's website and enter Case No. 07MS-11-454 (you don't actually have to enter the "11" as that is simply a notation indicating the case was filed in November) to see the docket showing the pleadings which have been filed. To see copies of pleadings, you can make a personal visit to the Franklin County Clerk of Courts and view them on computer terminals provided there.

Original Complaint. According to the Perry Entities' receivership Complaint, filed November 7, 2007, the impetus for seeking appointment of a receiver/liquidating trustee resulted from such problems as (1) numerous cognovit judgments having been taken against the Perry Entities by The Home Savings and Loan Company of Youngstown; (2) dozens of mechanics' liens filed against Perry Entities; and (3) numerous other lawsuits filed against the Perry Entities. The Complaint for Judicial Administration of Winding Up of Affairs of Voluntarily Dissolved Corporation and Limited Liability Companies has eight counts which are:

• Appointment of Receiver for C.V. Perry; R.C. 1701.89(A)(8)
• Appointment of Liquidating Trustee for the Limited Liability Companies; R.C. 1705.44
• Establishment of Proof of Claims Procedure; R.C. 1701.89(A)(1), 1705.45 and 1705.46
• Settlement or Determination of Claims; R.C. 1701.89(A)(3), 1705.45 and 1705.46
• Determination of Rights of Holders of Shares; 1701.89(A)(4), 1705.45 and 1705.46
• Presentation and Filing of Receiver's and Liquidations Trustee's Account; R.C. 1701.89(A)(5) and 1705.44
• Injuctive Relief; R.C. 1701.89(A)(9) and 1705.44
• Allowance and Payment of Compensation to Receiver, Liquidating Trustee, Attorneys, Accountants, and other Persons; R.C. 1701.89(A)(10) and 1705.44

Order Appointing Receiver and Liquidating Trustee. An initial Order appointing the receiver/liquidating trustee was entered the same day as the Complaint was filed, but an Amended Order Appointing Receiver and Liquidating Trustee was entered on December 5, 2007. The Amended Order granted the relief sought in the Complaint and required the newly appointed Receiver and Liquidating Trustee to post a bond of $100.00 with the Franklin County Clerk of Court.

So why the appointment as Receiver and Liquidating Trustee? Simply put, what statutory authority Ohio has concerning the liquidation and winding up of the affairs of business entities are slightly different with respect to corporations and limited liability companies. Ohio Rev. Code 1701.89, applying to corporations, references appointment of a receiver. Ohio Rev. Code 1705.44, the analogous statute for LLCs, refers to a "liquidating trustee".

Local Rule 93. In addition to these statutes, Franklin County Court of Pleas Common Pleas Court Local Rule 93 (courts elsewhere in Ohio will have their own rules which may differ in important respects from this rule) will govern procedures and events in this case. Among other provisions, Local Rule 93 requires the filing of an initial inventory and appraisal of the assets of the entity placed in receivership by the court appointed receiver within two months of his or her appointment, together with receipts and disbursements received and made to that point. It also restricts a receiver's fees to no more than $75 an hour and caps fees for counsel for a receiver at $150,000 (which may seem like a lot, but in this case may pose a problem for the receiver's counsel).

Events. What's happened so far has mainly been authorization to sell certain properties, establishment of a "proof of claim" procedure, and a fair amount of sparring about "administrative priority". I'll talk about the latter two of these in my next post.

So that's the lay of the land. In Part II, I will focus on the influence of federal bankruptcy law on these receivership proceedings.

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No matter how careful you are, if you have a business, at some point or other you may find yourself drawn into the legal system.  As Michael Hamblin of the Michigan Business Lawyer Blog points out, it is important to understand how the process works to avoid (or at least minimize) unrealistic expectations and/or frustration.  to help make sense of the way litigation works, Mike has written a series of posts, beginning with an overview of the process, explaining the various aspects typically found in a case once a Complaint has been filed.

Although there are some differences from one court to another, Mike's summary is generally applicable to courts in Ohio as well.  I have added some additional comments from my perspective as an Ohio business lawyer.  Click here for a diagram showing the structure of the Ohio judicial system.

Mike divides the process chronologically into five parts, namely

• Filing of initial pleadings
• "Discovery"
• "Summary judgment" pleadings
• Trial
• Post trial/appellate proceedings

Initial Pleadings.  All litigation starts with the filing of a Complaint.  The person or business initiating legal action is called the "plaintiff".  Mike explains the need at this point for both sides to decide whether they would prefer to have a trial in front of a jury or before a judge.  As in Michigan, the person or business against whom the Complaint is filed - known as the "defendant" - must assert "affirmative defenses" in an "Answer" which would contradict and defeat what the Complaint claims occurred.  In state court in Ohio, defendants have 28 days, a week longer than in Michigan, to respond to the Complaint by filing their Answer or certain other pleadings in appropriate cases.

In Ohio, cases seeking more than $15,000 must be filed in the Court of Common Pleas.  if the plaintiff is seeking less than this, the case may be filed in the appropriate  Municipal Court pursuant to Ohio Rev. Code 1901.17 or in the case of very small cases under $3,000 in Small Claims Court (or in some areas of the State, "Mayor's Court"), if the plaintiff so chooses.  Cases filed in Small Claims Court can be transferred to Municipal Court at the request of the defendat.  If the defendant has a countervailing claims against the plaintiff (which is known as a "counterclaim") which is greater than the amount allowed in Muicipal Court, Small Claims Court, or Mayor's Court, the entire case is transferred to the Court of Common Pleas.  For information about Small claims Court in Franklin County, Ohio, click here.  For links to many of the trial and appellate courts in Ohio, click here.

"Discovery".  Mike also explains the next phase typically referred to as "discovery" and describes the different sorts of activites this entails.  Basically, "discovery" is about asking questions, either orally or in writing, about the claims the other side is maing.  it is also the means by which each side is required to provide the other with copies of documents that "back up" their story.  As Mike points out, this can be an extremely time consuming (sometimes months) and often quite expensive aspect of the litigation process.

UPDATE: Chris Moander (Hi Chris, welcome to the blogosophere!) of the still fairly new Wisconsin Business Law and Litigation blog posted a terrific four-part series about "Fun with Discovery: How Discovery Works in Wisconsin".  While there may be some subtle differences between Wisconsin and Ohio law, what Chris has written is largely applicable to cases in Ohio as well.  For anyone caught up in the discovery process and wondering what the point of it all is, this is "must" reading.

• Part 1 - Introduction (focusing on the strategy and purpose of discovery)
• Part 2 - Depositions
• Part 3 - Interrogatories
• Part 4 - Requests for Admissions    

Summary Judgment.  Once discovery is complete, or a party has opted to forgo all or a portion of discovery, either the plaintiff or the defendant may decide to seek "summary judgment" on some or all of their claims.  If summary judgment is granted, the case is over and there is no trial.  This is possible if, given the "benefit of the doubt:, there is no "genuine" dispute of "material" (i.e. important) facts and one party is entitled to judgment as a matter of law.  If there is a lot of disagreement about the relevant facts, it is unlikely that summary judgment wil be granted to either side.  

Trial.  A trial can be held in front of a judge, or if requested at the time the defendant's initial pleadings, before a jury.  Somtimes "trial briefs" - which are generally not brief - are filed which outline the applicable law each side thinks should be applied to the issues in the case.  Depending upon the complexity of the case and the nature of the issues involved, a trial may last only a few hours or many weeks.  Trials are rarely, if ever, as exciting as they sometimes appear on TV or in movies.

After "opening statements", both sides have the opportunity to present evidence.  Evidence can be in the form of documents known as "exhibits" or through the testimony of various individuals known as "witnesses".  Cases involving business or commercial disputes are usually "bench" trials heard only by a judge.  Sometimes the judge will rule immediately at the conclusion of the trial, but more often it will be several weeks before the judge issues a deicison.  As mike points out, having quality legal representation is key to maximizing the likelihood of success.

Post-trial/Appellate Proceedings.  As in Michigan, parties unhappy with the outcome of trial or grant of summary judgment may appeal the judgment, first to the applicable regional Court of Appeals  and then to the Ohio Supreme Court.  That appeal must be filed within thirty days after the final judgment is entered.  As in Michigan, appeals from the Court of Appeals to the Ohio Supreme Court are discretionary in nature.  this means they are permitted only if the Ohio Supreme Court accepts jurisdiction after reviewing the appellant's Memorandum in Support of Jurisdction and the appellee's countervailing brief.  Oho Court of Appeals' jduges and Ohio Supreme Court Justices, like their trial court counterparts, are elected by Ohio voters.

Consensual Resolution.  If a case is going to be resolved by the parties themselves rather than leaving it to a judge or jury, there are several points along this timeline where this typically occurs.  Shortly after the Complaint is filed and before either side has committed substantial resources of time or money, cases are often settled.  At various points during discovery is another common time when cases are resolved by the parties.  And many cases are settled just before trial.  An experienced attorney can be helpful in identifying these windows of opportunity.  

N.B. - Acccidentally deleted this post and had to recover it, 

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As a bankruptcy attorney who mostly represents creditors, I am not infrequently asked to assist companies who have recently received correspondence demanding that they repay thousands of dollars of payments received from a now bankrupt customer because it's a "preference". Often this happens well into the bankruptcy proceeding and long after the creditor has closed its books on the account, perhaps even writing off a remaining balance as uncollectible. If you have been unfortunate enough to be tagged for a "preference", the most important thing to remember is that you still have options and it is not always necessary to just write a check for the amount demanded.

Bizpointer>>> As a practical matter, it is NEVER wrong for a creditor to accept a payment even if the creditor thinks it might be a "preference". For one thing, the failing company may last longer than you think and may not file until after the payment to you is outside the ninety day preference period. In addition, to recover, it is the debtor which must demonstrate its "insolvency" at the time the payment was made. Furthermore, there are a number of defenses which can be asserted which can wind up justifying the creditor's receipt of the payment. Finally, preference actions are typically matters especially susceptible to neogtiation and settlement which may allow creditors to keep a portion of the prefernce payment.

Bankruptcy Preference Defined. So what, exactly, is a "preference" and what should you do if you get one of these letters, or worse, actually get sued? Basically, a "preference" is a payment that allows the recipient to receive more than their fair share of the now bankrupt customer's available cash and assets. The Bankruptcy Code says that a "preference" must be repaid because it frustrates the underlying policy of federal bankruptcy law that similar creditors should be treated in a similar fashion. This policy is intended to discourage a mad grab by creditors that might accelerate a financially ailing company's slide into bankruptcy.

On a more technical level, section 547 of the Bankruptcy Code defines a "preference" as a payment

• On an antecedent (i.e. past due) debt owed to a creditor;
• Made while the now bankrupt customer was "insolvent";
• Within 90 days (or a year, if the creditor is an "insider" such as a shareholder, officer, or director of the bankrupt debtor, or another affiliated company) before the date the bankruptcy proceeding was filed; AND
• That allowed the creditor to receive more on its claim than it would have had the payment not been made and the claim paid through the bankruptcy proceeding.

Banks and other creditors holding collateral for a debt can wind up receiving a preference payment if they are owed more than the collateral is worth. However, it is unsecured creditors such as the ordinary trade creditor in the form of suppliers, product inventors, and service providers that are the most vulnerable. In addition, it is important to understand that a preference claim can be asserted against a creditor even if the debtor still owes money to the creditor after the payment.

How to Respond. The records of a company in bankruptcy are, not surprisingly, often disorganized and sometimes incomplete. As a result, the net for possible preference payments is usually cast far wider than the true universe of actual preference payments. Thus, once fingered as a possible preference payment defendant, it is crucial to do a thorough "preference analysis" to determine whether there is really any actual liability.

A bankruptcy and creditors' rights attorney has the skills and experience to assist with this crucial task of evaluating what the likely liability exposure is. Martindale-Hubbell's Counsel to Counsel magazine offers this helpful, but very brief, overview of action steps and conceptual considerations that should be undertaken by any company being confronted with preference allegations.

• The CMA Daily News offers several suggestions about how to avoid being in a preference payment situation by taking certain preventive action such as requiring payment in advance of supplying goods or services.

• Thomas Onder of the New Jersey Law Blog recommends that, before contacting your attorney, you should try to gather a full payment history for the period of at least the year before the payment was made. A copy of all invoices showing both sales and payments received during this period is essential to a good defense. In addition, copies of any correspondence (including e-mail), contracts, checks, or other evidence of payments received can be extremely helpful. If you can determine the number of days which generally elapsed between presentation of the invoices and receipt of payment and detect any patterns, that can also be useful.

• Why is this information useful? Well, the two leading defenses to a preference action rely upon what this information can show. The "contemporaneous exchange" defense found in section 547(c)(1) excepts payments where the debtor receives something of value at the same time the payment is made. A related defense depends upon the amount of "subsequent new value" extended to the debtor by the creditor. Alternatively, the "ordinary course" argument based on section 547(c)(2) rests upon a demonstration that a payment comported with a reasonable course of dealing between the creditor and the debtor.

How This Helps in the Defense of a Preference Action. A preference analysis can utilize this information and preventive action to determine whether there is in fact a defense to the demand for repayment of the alleged preference payment. Three of the most common defenses are:

Contemporaneous Exchange. In many cases, as the now bankrupt customer begins to have more and more severe financial problems, there will be times in which the need for a particular shipment of goods or services is so great, that there will be payment for that particular shipment. When the shipment of goods or services and receipt of payment for those goods and services happen more or less at the same time, there is said to be a "contemporaneous exchange", constituting an exception within the meaning of section 547(c)(1) of the Bankruptcy Code.

Ordinary Course of Business. Section 547(c)(2) of the Bankruptcy Code offers another defense if the payment was made in the "ordinary course of business or financial affairs" of the creditor and bankrupt customer in payment of a debt "incurred in the ordinary course of business or financial affairs" of the parties. Payment made "according to ordinary business terms" are also excepted. Thus, both the course of dealing between the parties as well as customs in the relevant industry can be important. Changes in the Bamkruptcy Code in the last few years has made it somewhat easier to rely upon this defense.

Subsequent New Value. Sometimes, even as a financially distressed company struggles for survival, it is able to induce creditors to continue doing business with it, perhaps on the strength of a promise to get everything caught up in the near future or a partial payment of the past due amount. If there are both payments and supplying of goods and/or services within the ninety day "preference period", it is likely that the "subsequent new value" defense found in section 547(c)(4) will be applicable at least to some extent. If applicable, the amount of "subsequent new value" extended will be subtracted from the amount of payments received.

All of these defenses depend greatly on the timing of invoices and payments and require a careful legal analysis of the creditor's documentation. Once a preference analysis has been completed by a bankruptcy attorney, you will have a much better idea of the strength of your case. This will then allow you to make a legally informed decision whether to fight or negotiate your best settlement quickly, thus minimizing the cost both in the amount paid back and attorneys' fees.

UPDATE: David Lerner, an attorney in the Bloomfield Hills office of my Plunkett Conney law firm, has made this excellent half hour presentation (webinar with streaming audio and video lasting about a half hour) covering the basics anyone needs to know about bankruptcy preference law. 

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Your best salesperson has just left for your major competitor.  Although you are fairly certain she didn't take any company documents or written customer lists, you are equally sure that she knows EXACTLY who your best customers are and the most effective way to contact them.  You always meant to get an Employment Agreement, complete with noncompetes and confidentiality provisions, signed up with this employee, but somehow never quite got around to it.  So what now?  Is there anything you can do?

Well, last week the Ohio Supreme Court brought joy to the hearts of procrastinating employers everywhere in the state when it ruled that the use of a memorized customer list by a former employee to the detriment of his one-time employer constituted a trade secret protected under Ohio's Uniform Trade Secrets Act.  In Minor & Assoc. v. Martin, 2008 Ohio 292, a unanimous Ohio Supreme Court upheld a trial judgment in favor of the employer in the amount of $25,973 even though the employee had no employment agreement and was not subject to any noncompete or confidentiality provisions.  The Public Information Office of the Ohio Supreme Court issued this summary of the decision.

Issue Presented. The new Employer Law Report blog [welcome to the blogosphere], in a post prior to the issuance of the decision, framed the dilemma facing the Court as "creating what in  most cases would be a non-solicitation prohibition of an indefinite term" and a ruling that "could open the doors to the creation of de facto non-competition/non-solicitation agreements for which neither employers nor employees bargained."  As seen by the Ohio Supreme Court itself, the positions of the parties were as follows:

Martin asserts that a client list memorized by a former employee cannot be the basis of a trade secret violation and that the appellate court's decision in this case overly restricts his right to compete in business against AMA.  He also argues that AMA should not have the right to control the use of his memory and that AMA had the opportunity to protect its confidential information by way of an employment contract, which it did not do.

 

AMA counters that public policy in Ohio favors the protection of trade secrets, whether written or memorized; that the definition of a trade secret should focus on the nature of the information and the potential harm that its use would cause the former employer; and that no meanigful difference exists between a written and memorized client list.  

Decision.  This decision resolved a split in Ohio appellate courts.  Despite initially framing the issue somewhat more broadly, the Ohio Supreme Court chose to focus on the extremely narrow issue of whether the fact that the client list in question was memorized took it outside the protection of the Uniform Trade Secrets Act, codified in Ohio Rev. Code Chapter 1333.  After noting that the majority view made no distinction "between information that has been reduced to some tangible form and information that has been memorized" and recognizing that protection of trade secrets involves a balancing of public policies, the Ohio Supreme Court held:

the determination of whether a client list constitutes a trade secret pursuant to R.C. 1333.61(D) does not depend on whether it has been memorized by a former employee.  Information that constitutes a trade secret pursuant to R.C. 1333.61(D) does not lose its character as a trade secret if it has been memorized.  It is the information that is protected by the USTA, regardless of the manner, mode, or form in which it is stored - whether on paper, in a computer, in one's memory, or in any other medium.  

In somewhat interesting dicta, the Ohio Supreme Court hastened to add:

Every employee will of course have memories casually retained from the ordinary course of employment.  The Uniform Trade Secrets Act does not apply to the use of memorized information that is not a trade secret pursuant to R.C. 1333.61(D).

>>Unintended Consequence.  Jon Hyman of the Ohio Employer's Law Blog sees the decision as an expansion not only of trade secret protection, but also the class of employees against whom noncompetes can be enforced.  While that might initially appear to benefit employers wanting to protect sensitive information, Jon adeptly points out that this may also complicate matters for employers hiring former employees of competititors.  Just asking these new hires whether they are subject to noncompetes or confidentiality provisions and ensuring they've brought no documentation with them may no longer be enough.  

For some of the other thorny questions raised by the decision, read Kevin Griffith's post in the Employer Law Report Blog.  In particular, Kevin wonders whether the "simple knowledge that the Al Martin clients were in need of pension analysis services would have trumped the publicly available information  [obtained through Google] to preserve the protection of the trade secret."  He also agrees with Jon that employers hiring employees from competitors may now have addditional hurdles to that decision.

Issue Not Addressed.  I agree with Jon and Kevin that the decision raises troubling questions for employers considering hiring one of the employees of the competition.  However, one of the  things I find most interesting about the decision is what WASN'T ADDRESSED, namely the scope of what constitutes a "trade secret" in the first place.  While Martin briefed this issue, it apparently was never raised in his memordandum in support of jurisdiction so the Ohio Supreme Court made it clear that this issue was not before it, in essence assuming without deciding that the customer list in question was in fact a trade secret.

To really evaluate what this decision means for the future, I think you have to go back to the Franklin County Tenth Appellate District Court of Appeals decision, 2006 Ohio 5948 , which spends considerable time on this particular question.  It notes that "[a] customer list is an intangible asset that is presumptively a trade secret when the owner of the list takes measures to prevent its disclosure in the ordinary course of business to persons other than those the owner selects."  The Court of Appeals then goes into some detail about the measures taken by the employer in this particular instance:

the trial court determined AMA's client list was an intangible asset that AMA acquired by devoting considerable time and resources over a 20-year period.  The trial court also concluded AMA took sufficient precautionary measures to assure the client list remained confidential, including (1) informing its employees that its client information was confidential and was not to be made public; (2) circulating a Computer Usage Policy that reminded its employees the client names and associated information were confidential, were not to be made public, and were not to be removed from the confines of the office; and (3) securing client information from those entering AMA'a office....

 

the trial court, through its magistrate, found that although a browser could enter an individual client's name into http://www.freeerisa.com/ and obtain the client's contact information, a browser could neither independently obtain a compiled list of the clients AMA serviced nor determine which clients needed third-party pension plan administrative services....

 

The evidence demonstrates AMA spent considerable time and energy compiling its client list and used adequate measures to protect the client information from its competitors.  Because the evidence reflects no readily available means by which someone outside the employ of AMA can specifically identify AMA's clients and readily determine which clients need third-party pension plan administrative services, AMA's client list is a trade secret under R.C. 1333.61(D).            

What is perhaps even more interesting is the Court of Appeals take on the "tension between a company's right to be protected against unfair competition and an individual's right to the unhampered pursuit of livelihood."  Because the request for injunctive relief had been withdrawn, the Court of Appeals felt that it was not called upon to resolve this tension and explicitly states that "the trial court's judgment does not enjoin defendant from contacting AMA clients in the future but only requires defendant to compensate AMA for past monetary damages."  In addition, the Court of Appeals rather tantalizingly takes note of "the constantly changing nature of business information and the relatively short period of time during which such information can be deemed sufficiently relevant to warrant trade secret status." 

So what I'm wondering is how would this all come out if a former employee of a start-up business (which never really had a chance to implement precautinary measures to protect customer lists) moves to a more established competitor with a customer list in his head largely consisting of customers this employee brought into the former employer, especially if a few months go by between the time the employee leaves the start-up and starts working for the established corporation. 

Bizpointers.  So what does this all mean for the mobility of key employees and the effect on businesses?

• If you're an employer concerned about protecting customer lists and other sensitive information, you are certainly in a stronger position than before, especially with respect to information being carried around in the heads of key employees.  However, you can't just assume that you're now covered as far as trade secret protection.  DO take the time to implement at least some precautionary measures emphasizing the confidentiality of this information with employees.  Formal written policies would be best, but even customary office practices will help.  And, yes, having employment agreements, noncompetes, and/or confidentiality agreements for key employees is still a good idea.  

• If you're an employer considering hiring away some of the competition's best people, the recruiting process may have gotten more complicated.  You still need to ask about noncompete and confidentiality agreements, but now even if the prospective employee isn't subject to one, there could be trouble down the road.  If you really want to be safe, consider having these individuals work in other capacities within your company for a few months.

• If you're an individual considering making a move across the street, understand that the process may now be more complicated, even if you are not subject to a noncompete or confidentiality provision.  Go easy on contacting customers of your old employer for the first few months at your new position.

• And one more thing....  If you're considering selling a business with confidential customer lists and other trade secrets and ensuring that key employees stay with the company following the change in ownership is important to the value of the business, recognize that this new decision by the Ohio Supreme Court may mean you can assign some additional value to the business that a prosective buyer may be willing to pay. 
  • To the extent it just got harder for competitors to hire top employees, the buyer can be more assured of retaining the employee base and the extra value associated with that continuity.   
  • In addition, if the seller of a business can be prevented from using "customer lists" that are in his/her head, there is a value to that.  This is particularly true when the seller has operated a business for many years and has long-time customers who have become friends.  (In other words, the seller did not review a customer list, repeat the list to himself over and over until he/she got to the car, and then scribbled the list frantically before leaving his former employer's parking lot).  Apparently, under this decision, the seller may NOT solicit, contact or use that knowledge to compete with the buyer--even when the buyer did not protect himself by negotiating a non-compete/non-solicitation agreement, at least for some period of time.  When negotiating an asset purchase transaction, this decision might be relied upon to create value and designate some sum of the purchase price to this intangible asset.  Hat tip to my colleague Chris Pettit here at Lane Alton for suggesting this possibility.       

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Over the holidays, the Ohio Supreme Court upheld the damages caps enacted by the Ohio General Assembly in 2004 (and effective in 2005) on pain and suffering and other "noneconomic" damages in personal injury lawsuits and other tort actions (other than medical malpractice cases), as well as on punitive damages in other cases. The 5-2 ruling in Arbino v. Johnson & Johnson, 2007 Ohio 6948, came in a products liability lawsuit brought by a Cincinnati woman against Johnson & Johnson Pharmaceutical Co. seeking recovery for blood clots and other serious medical problems she suffered after using a birth control patch.

• Getting to the Point Quickly. For those not wishing to read the entire 75-page decision (including a 30+ page majority opinion), but still wanting to experience the full flavor of the case, the informative and well-written Opinion Summary (containing crucial quotes from the various opinions) issued by the Ohio Supreme Court's Communications Office may prove a useful substitute. For those wanting something even more to the point about was decided, I suggest reading the Drug and Device Law Blog's excellent and concise recent post explaining the basic legal import of the decision.

The decision in this closely watched case -- which had numerous amicus briefs submitted -- is being widely viewed (and denounced) as a victory for "Big Business" at the expense of the "average Joe". Click here for coverage by the Cleveland Plan Dealer blog and public comments. Interestingly, in the Wall Street Journal Law Blog's posting (which also contains numerous unhappy comments on the ruling) on this decision, it noted that a nearly contemporaneous decision by the Oregon Supreme Court reached a "divergent ruling." More on that below.

Decision and Pertinent Law. The case involved the consititutionality of Ohio Rev. Code 2315.18 involving caps on noneconomic damages in "tort actions" and Ohio Rev. Code 2315.21 regarding caps on punitive damages. Specifically, the Ohio Supreme Court ruled that these statutes do not violate the constitutional rights of injured parties to (1) trial by jury, (2) a remedy at law for their injuries; or (3) due process and equal protection of the laws. In addition, the Court held that Ohio Consitution provisions guaranteeing open courts and the separation of powers between the legislative and judicial branches of government were not violated by the legislation.

Chief Justice Moyer was joined in his majority opinion by Justices Judith Ann Lanzinger, Evelyn Lundberg Stratton and Maureen O'Connor; Justice Robert R. Cupp agreed with the majority, but wrote a separate concurring opinion focusing on a historical analysis of the rationale for trial by jury. Justices Paul E. Pfeifer and Terrence O'Donnell authored separate dissenting opinions.

The statutory "noneconomic" damages cap at issue limits damages for intangible injuries (such as pain and suffering, loss of consortium, disfigurement, mental anquish. etc.) that may be awarded in "tort actions" to the greater of $250,000 or three times the economic damages awarded -- up to an absolute maximum of $350,000 -- unless the plaintiff suffers a permanent disability or the loss of a limb or body organ in which case there is no cap. "Tort actions" include product liability claims, but do not include medical malpractice type claims; other non-medical professional negligence claims (such as those against attorneys, CPAs, architects, and engineers) appear to be encompassed within the statute limiting recovery of damages. Ohio Rev. Code 2315.18(A)(7).

Punitive damages were limited by the newly enacted legislation to twice the amount of compensatory damages awarded from the same defendant.

• Liability Limits on Individuals and "Small Employers". In addition, Ohio Rev. Code 2315.21(D)(2)(b) further limits punitive damages against individual or "small employer" defendants to the lesser of (A) twice the compensatory damages awarded against that defendant; or (B) ten percent (10%) of that defendant's net worth. A "small employer" is defined by Ohio Rev. Code 2315.21(A)(5) as either having 100 or fewer permanent full time-employees or, if the defendant is a "manufacturer", not more than 500 full-time permanent employees.

Majority Opinion

While the noneconomic damages cap and the punitive damages cap are analyzed separately in the lengthy majority opinion, the rationale for upholding each is largely the same.

Past Ohio Legislative Efforts and Decisions in Other States. In his majority opinion, Chief Justice Thomas Moyer noted that the Ohio General Assembly had repeatedly passed tort reform laws over the past few decades which had been overturned by the Ohio Supreme Court, but stated that

A careful review of the statutes at issue here reveals that they are more than a rehashing of unconstitutional statutes. In its continued pursuit of reform, the General Assembly has made progress in tailoring its legislation to address the consittutional defects identified by the various majorities of the court. The statutes before us here are sufficiently different from the previous enactments so as to avoid the blanket application of stare decisis and to warrant a fresh review of their individual merits.

Chief Justice Moyer also observed that various states have reached differing conclusions regarding whether awards in defective product and malpractice situations should be restricted. (Footnote 9 to the majority opininion cites cases in Illinois, New Hampshire, North Dakota, South Dakota, and Wisconsin striking down damages caps as uncsonstitutional; footnote 8 cites many other cases reaching the opposite result.) However, in the majority's view, the judiciary had no basis for overturning the Ohio law; "This court is not the forum to second-guess such legislative choices; we must simply determine whether they comply with the Constitution, " Moyer wrote.

Right to a Jury Trial. In addressing the right to a jury trial issue, Chief Justice Moyer found that the right was not "absolute" and that the damages caps did not trample upon the jury's central fact-finding responsibility. Rather it involved only applying law to those facts and "[b]y limiting noneconomic damages for all but the most serious injuries, the General Assemply made a policy choice that noneconomic damages exeeding set amounts are not in the best interest of the citizens of Ohio."

Open Courts and Right to Remedy Constitutional Provisions. The Court further ruled that the statutes limiting noneconomic and punitive damages did not run afoul of the Ohio Consititution's provisons promising "open courts" and a "right to remedy" because the limits do not "wholly deny persons a remedy for their injuries." According to Chief Justice Moyer, " [w]hile the statutue prevents some plaintiffs from obtaining the same dollar figures they may have received prior to the effective date of the statute, it neither forecloses their ability to pursue a claim at all nor 'completely obliterates the entire jury award'."

Due Process and Equal Protection. The Ohio Supreme Court also found no violation of equal protection or due process because the statutes' caps bear a"real and substantial relation to the general welfare of the public" and are neither arbitrary or unreasonable, in part because there is no cap for those "suffering catastrophic injuries." According to the majority, the caps on damages also bear a rational relationship to a legitimate governmental purpose of "reforming the state civil justice system to make it fairer and more predicatable and thereby improving the state's economy."

Separation of Powers. Chief Justice Moyer dealt with this challenge summarily, opining that while determining damages is certainly a question of fact reserved to a jury, "that function is not so exclusive as to prohibit the General Assembly from regulating the amount of damages available in certain circumstances."

Concurring and Dissenting Opinions

Justice Cupp's Concurrence. Justice Cupp had some concerns about the jury trial challenge. After delving into a historical analysis of the right to a jury, Justice Cupp concludes that "[l]egislative action, however, may alter or limit what damages the law makes available and legally recoverable. in doing so the General Assembly does not trespass upon the right to a jury."

Justice O'Donnell's Dissent. Relying on the Ohio Supreme Court's decision in Sorrell v. Thevenir, 69 Ohio St.3d 415, 633 N.E.2d 504 (1994), Justice O'Donnell opined that the noneconomic damage caps of Ohio Rev. Code 2315.18 violate the right to have all issues, including the amount of damages, determined by a jury. He specifically found fault with the majority's analogy of damages caps to treble damages. He also stated that "while it may be argued that the General Assembly may abolish a common-law cause of action in its entirety without violating due process or equal protection, such reasonaing soes not imply that the legislature may establish by statue the maximum amount a litigant may recover where the Constitution provides that a litigant has the right to have a jury make that determination." In addition, Justice O'Donnell took issue with Justice Cupp's analysis of the historical basis for trial by jury. His dissent did not specifically address the majority's ruling on punitive damages.

Justice Pfeifer's Dissent. Justice Pfeifer's lengthy dissent rejected the holding of the majority on every issue, concluding

I have a basic philosphical difference with the members of the majority and what they have written in the majority opinion. I believe that the Constitution is the fundamental document that protects all Ohioians, not just thoese with the most lobbying power. I believe that the Constitution says what it says for a reason and that no part of our judicial system exists merely to enable the General Assembly to write around the Constitution. I believe that the Constitution should be altered only by amendment, not by legislative or judicial fiat.... If the General Assembly had the courage of its convictions, it would submit caps to the voters -- that is the proper way to amend the Constitution..... If the members of the majority had the courage of their convictions, they would not allow the General Assembly to circumvent the amendment process....

Today is a day of fulfilled expectations for insurance companies and manufacturers of defectice, dangerous, or toxic products that cause injury to someone in Ohio. But this is a sad day for our Constitution and this court. And this is a tragic day for Ohioians, who no longer have any assurance that their Constitution protects the rights they cherish.

In Justice Pfeifer's view, the majority's opinion would allow the General Assembly to limit damages to even just $1, thereby in essence making any right to a jury meaningless.

In response to the majority's argument that caps are helpful to business, Justice Pfeifer also noted that the caps imposed by the statute are over-inclusive in that they benefit businesses regardless of whether the business is located in Ohio.

Contemporaneous Oregon Decision Striking Down Damages Caps

While the decision in this closely watched case is interesting and certainly important on its own, the nearly contemporaneous lengthy decision by the Oregon Supreme Court in Clark v. Oregon Health Services University which reached a divergent conclusion with respect to a less tailored statute is also interesting. For news media coverage of, and public comment on, this decision, click here. The decision involved a brain damaged child injured as a result of medical negligence and an Oregon statute (Oregon Rev. Statutes 30.270) which limited total damages to $200,000; the plaintiff raised similar right to a jury trial and right to a remedy arguments as in Arbino.

However, one important distinction between the two cases is that the injury occurred in a state university hospital and the statute in question was specific to state defendants and individuals employed by the state. Because the state defendant would have been entitled to sovereign immunity under common law, the Oregon Supreme Court had no trouble upholding the damages cap with respect to the hospital. However, with respect to the individual defendants, the Court reached a different conclusion.

As the Oregon Supreme Court framed the issue:

[T]he state contends that the determination of whether a substitute remedy is adequate should not focus on the facts of an individual case, but instead should focus on the balance struck by the legislature in creating a substitute remedy. The state asserts that, unless a category of potential plaintiffs is left without a remedy, the legislative policy choice is conclusive. On the other hand, plaintiff contends that the Remedy Clause protects both the procedure for seeking redress as well as the substance of that redress. Plaintiff argues further that, when the legislatiure abolishes a common-law remedy, it must provide a remedy that is "substantially equivalent" to the common-law remedy.

While the Oregon Supreme Court acknowledged the legislature's right to "modify the nature, the form, or the amount of recovery for a common law remedy", it held that this authority was not unlimited and the statute had impermissibly competely eliminated any right to recovery.

In a lengthy concurrence by Justice Balmer, joined by Justice Kistler, the "arbitarily low" nature of the cap was emphasized as a "problem that has long called for a legislative solution." It also emphasized that it was still possible for the legislature to impose "some" limits on recovery.

What's it All Mean?

So what does this mean to "regular" Ohio businesses?

• For starters, if you haven't already signed key employees up to confidentiality/non-disclosure and/or non-compete agreements, you certainly should now if you want to have any chance of recovering the full amount of any damages caused by their departure to a competitor.

• Limitations on punitive damages for smaller companies implicitly upheld.

• Look for further state legislative efforts im the medical malpractice arena which could (but let's face it, probably won't) favorably affect health care costs faced by Ohio businesses for their employees.

Limiting Damages in Employment Discrimination and Other Business Tort Cases. John Hyman has speculated in his Ohio Employer's Law Blog post on the Arbino ruling that some might attempt (unsuccessfully in his view) to expand the decision regarding caps on noneconomic damages to cover employment discrimination claims. Certainly, one would expect defendants to make every effort to expand the definition of "tort action" -- which the statute defines simply as a "civil action for damages for injuries or loss to person or property" -- as broadly as possible. The statute does specifically exclude medical malpractice type causes of action and "damages for breach of contract or another agreement between persons", but beyond that, the full scope of the statute is yet to be defined.

And while employment law claims may be rooted in statute, most business tort actions are more easily categorized as descendants of common law actions. And when does an injury result from a "breach of contract" rather than commission of a tort action anyway?

Consider the usual case in which a key employee with knowledge of certain "trade secrets" or other confidential information has been lured away by a competitor. Depending upon whether a confidentiality, non-disclosure, or non-compete style agreement has been executed, there may or may not be contractual claims against the defecting employee. However, there will almost always also be claims sounding in tort against the defecting employee and it is virtually certain that business interference or unfair competition type tort claims will be leveled against the new employer. Does the statute limiting damages apply in this instance?

If the employee has signed some sort of contractual agreement limiting his or her use of proprietary information, then the statute limiting damages against him or her clearly doesn't apply. This is certainly good news for businesses concerned about losing key employees to the competition and ought to provide even more incentive to obtain these sort of agreements from these employees -- beyond whatever good counsel the company's attorney has already given about the importance of having this agreement.

What about the competitor who has snapped up the employee in question? Here there is no direct contractual agreement with the aggrieved company. Yet the injury may arise because of a contractual breach by the defecting employee. So does the limitation on damages apply? Given the emphasis of the statute on matching damages limitations with the defendants responsible, I would think not, but it is still an interesting argument and one that I would expect to be tested.

Small Business Punitive Damages Limitation. From the perspective of the privately held, owner operated, "small business", perhaps the best news is that there is in fact now a LIMIT to the maximum amount of punititive damages that could be assessed against a business of ten percent (10%) of the company's net worth. However, since for smaller companies, the compensatory damages alone can sometimes be devastating, one wonders if attempts to limit even these damages will follow.

Medical Malpractice Claims. If I was an Ohio state legislator looking at this decision which told me I'd finally "gotten it right" as far as limiting tort damages, I think I'd start thinking about moving into the medical malpractice area and applying the same logic there. Logically, other than lobbying efforts, there is no reason to exclude medical malpractice claims from the operation of the statute. Make a few considered exclusions for the "really horrific" injuries or negligence and you should be "good to go".

Conclusion

So there you have it. A major Ohio Supreme Court decision soldifying the impression that "business-friendly" rulings are here to stay for a while. It will definitely be interesting to see how the case law develops regarding the ultimate scope and effect of these damages caps and whether they do in fact have the desired economic effect.

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If your business receives a "bad check" from a customer, there may be a solution you haven't considered.  Under Ohio law, in certain circumstances you may be entitled to "treble damages" equal to three times the amount of the check, plus your attorneys' fees.

Here is the way it works.  Under Ohio Rev. Code §2913.01 and §2913.11, if someone gives you a check and there is not enough money in the account to pay the check, a criminal theft offense has been committed.  Ohio Rev. Code §2307.60 allows a person injured by a criminal act such as a theft offense to bring a civil action to recover damages, plus attorneys' fees.  Ohio Rev. Code §2307.61 speaks to the amount of those damages.

Pursuant to Ohio Rev. Code §2307.61, the recipient of a bad check is entitled to receive, at its choice, either compensatory or liquidated damages.  Compensatory damages are awarded as follows:

•     $50 if the loss was $50 or less

•     $100 if the loss was more than $50 but no more than $100

•     $150 if the loss was more than $100

Liquidated damages is the greater of either $200 or three (3) times the amount of the check, plus any charges imposed by the recipient's financial institution as a result of there being insufficient funds in the issuer's account, "irrespective of whether the property is recovered by way of replevin or otherwise, is destroyed or otherwise damaged, is modified or otherwise altered, or is resalable at its full market price."  In plain English this means that you can get treble damages (i.e. three times the amount of the check) even if you get the goods back that the "bad check" was used to purchase.  

If the original amount involved is less than $5000, the recipient of the bad check can also recover "reasonable administrative expenses" if a written demand for payment of the treble damages is made by certified mail, receipt requested, in accordance with the requirements set out in the statute.  Ohio Rev. Code §2307.61(A)(2).  "Administrative expenses" includes "the costs of written demands for payment and associated postage."  Ohio Rev. Code §2307.61(H)(1).  The notice must be sent at least thirty days prior to filing any lawsuit.

While the statute does not seem to require it, caselaw has imposed the same notice requirement on parties seeking treble damages because not requiring it "would defeat the public policy of encouraging parties to settle their disputes outside the judicial system."  Buckeye Check Cashing Inc. v. Proctor, 199 Ohio App. LEXIS 2678 (Franklin County)

Thus, the key thing to remember is that a notice must be given the perpetrator who issued the check at least thrity days before initiating a lawsuit.  To be efective, that notice must contain certain specific information pursuant to §2307.61(C):

• The specific property damage or theft offense committed

• The amount of damages for which recovery is sought

• Notice that if payment of the specified demand amount is made within thirty days thereafter or an agreement for payment is made within that time and kept, no lawsuit will be filed

• Notice that if either payment of the damages demand is not made within thirty days or there is a default on any agreement made within that thirty days, a lawsuit may be filed

• The fact that any recovery in the lawsuit may also include attorneys' fees, reasonable administrative costs, court costs, and any compensatory damages provable

To be sure you have sent an effective notice, be sure to read the satute carefully or consult an attorney before sending it out.  In addition, sending the notice by both regular and certified mail is a good idea.

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Obtaining a judgment is rarely the end of a matter when it comes to actually getting paid for a delinquent debt.  However, it is important to ensure that the judgment entry memorializing a creditor's entitlement to payment properly reflect the interest owed. 

Ohio Revised Code §1343.01 establishes a maximum rate of interest of 8% for contracts, promissory notes, and other writings, as well as a number of permissible exceptions to that maximum, including situations involving loans over $100,000.

If, however, the contract, promissory note, or other writing does not specify an interest rate, or judgment has been obtained on a tort claim or verbal agreement, the applicable interest rate on the judgment is established pursuant to Ohio Revised Code §1343.03.  According to this statute, the applicable rate of interest in this instance is determined by application of Ohio Revised Code §5703.47 which requires the Ohio Tax Commissioner to establish the applicable interest rate for the next year by October 15 of each year.

After performing the necessary calculations, the Ohio Tax Commissioner has determined that the applicable statutory interest rate on judgments obtained in 2008 will be 8%, the same as in 2007.  For a list of the applicable statutory interest rate for judgments obtained in prior years, click here.  Over the last twenty years, the applicable statutory interest rate has been as low as 4% in 2004 and as high as 11% from 1989-1991.  The rate is based upon the "federal short-term rate". 

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About a week ago, established Central Ohio custom home builder C.V. Perry & Co. was placed in state court receivership to liquidate its assets.  (Case No.07-MS-454 in Franklin County Common Pleas Court, Judge Bender presiding - click here to visit the court's website and see the latest docket.)  C.V. Perry & Co. had been in business for sixty years and had faced increasing financial difficulties following the death of its founder and founder's son in 2004.  Click here to read more about what led up to the company's decision to shut down operations. 

What is most interesting about this development is the choice to utilize relatively vague state court receivership law rather than a more well-defined federal bankruptcy proceeding.  While it's not so prevalent that one could call it a trend yet, more and more often, litigants seem to be choosing state court receivership remedies in Ohio over federal bankruptcy court.  In part, the increasing popularity of receivership may be the result of a perception that it will be less costly and complex than federal bankruptcy -- which I'm not convinced is correct.  However, I think parties are also attracted to the concept that they can define how the receivership will operate in a way not possible in the more structured federal bankruptcy proceeding.

In Ohio, receiverships are governed primarily by the provisions of Ohio Revised Code Chapter 2735 and the local rules of the trial court in which the action is commenced.  In recent years, the primary use of receiverships in Ohio has been in conjunction with a foreclosure of income-producing commercial property by a mortgagee during the pendency of the lawsuit prior to the foreclosure sale.  However, Ohio Revised Code  §2735.01 also permits appointment of a receiver to carry out the terms of a judgment, in cases of corporate insolvency or "in all other cases in which receivers have been appointed by the usages of equity."  In addition, Ohio Revised Code §1701.90 specifically authorizes appointment of a receiver for the winding up of the affairs of a corporation and Ohio Revised Code §1701.91 regarding judicial dissolution of a corporation also contemplates use of a receiver.

Under Ohio law, both the circumstances justifying appointment of a receiver and the powers a receiver will have once appointed remain highly flexible.  While Ohio courts routinely note that appointment of a receiver is an "extraordinary remedy", there also seems to be substantial deference given to a trial court's determination that it is appropriate in particular circumstances.  Aside from relatively sparse case law, the only guidance regarding the scope of an Ohio receiver is found in Ohio Revised Code §2735.04 which states that a receiver "may bring and defend actions in his own name as receiver, take and keep possession of property, receive rents, collect, compound for, and compromise demands, make transfers, and generally do such acts respecting the property as the court authorizes."  Thus, unlike federal bankruptcy court where the rights and obligations of debtor and creditor are fairly clear, in an Ohio receivership action, the outer limits of permissible action by receivers has not yet been established.

Since I began practicing law more than twenty years ago, Ohio receivership law has always been a somewhat uncertain body of law.  In past years, however, that uncertainty seemed to encourage use of federal bankruptcy courts in insolvency situations.  Now, however, that very uncertainty and lack of established rules seems to be attracting both creditors and debtors as if they see receiverships as a "design your own" solution. 

At the same time, however, one can see some influence of bankruptcy law.  Orders appointing receivers now regularly contain "automatic stay" type provisions.  Frequently, a claims determination process similar to the proof of claim requirements in bankruptcy is mandated.  Asset sales are often modeled after the procedures used in bankruptcy court. 

Whether receivership is the answer in any particular case depends upon your role in the situation and what you hope to achieve in an insovency proceeding.  While the relative informality of the state court receivership is alluring, I believe  that in general both debtors, and especially creditors, are better served by participating in federal bankruptcy proceedings. 

For creditors, while I understand the attraction of perhaps being able to get orders from state court judges allowing the creditor all sorts of latitude in dealing with the assets of a debtor, I remain unconvinced that receivership will ultimately be less expensive.  The fact that there ARE established priocedures and responsibilities in a bankruptcy proceeding seem to me more likely to expedite resolution than the situation in state court receivership in which every issue is one in which almost anything could happen.  Moreover, aggreesive collection action seems more likely than receivership to result in available cash flow and assets being directed specifically in the direction of my client.

For debtors wishing to continue in business, state court receivership may actually offer a viable alternative to Chapter 11 proceedings which are indeed quite expensive.  Because Ohio receivership law is so undeveloped, there is an opportunity to choose which aspects of federal bankruptcy law are most beneficial while perhaps avoiding those considered less desirable.  Depending upon how the receiver is selected and the relationship which develops between the receiver and the principals of the debtor, state court may offer real opportunities for resurgence.  However, control over the company's business affairs may just as easily be irretrievably lost due to the sweeping scope of a receiver's powers. 

For debtors intending to liquidate, the advantage of a federal bankruptcy proceeding is that there is established law about what the effect of such a proceeding is. 

If the current trend towards utilizing state court receivership rather than federal bankruptcy court continues, it will be interesting to see how the case law develops concerning the grounds justifying appointment of a receiver and the scope of a receiver's powers once appointed.  

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