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

If a borrower or guarantor gives a security interest in a promissory note to a lender, the lender's main concern is probably whether the obligor on that note will pay up.  Understanding the underlying transaction giving rise to the note is not always a  high priority.  As a consequence, lenders can be misled about the enforceability of their security interest in a promissory note executed to evidence settlement of a tort claim if they are not knowledgeable about applicable law.

A few months ago, a savvy guarantor challenged the enforceability of my lender client's security interest in a promissory note by alleging that the note pledged as collateral evidenced a structured settlement of a tort claim.  The guarantor argued that the note evidenced the settlement of a discrimination lawsuit and pointed to some language in the applicable statute which at first certainly seemed to support the guarantor's position.  On closer examination, however, it became clear that while clever, the exclusion relied upon by the borrower was in fact much narrower than suggested by the guarantor. 

Direct Pay Letter?  Now to the casual dabbler in secured transactions law, it might seem that the best way to realize upon a promissory note evidencing a tort lawsuit settlement which has been pledged as collateral for a now delinquent obligation would be to send one of those “direct pay” letters.  Ohio Rev. Code §1309.406(A) – (I am sooooo glad Ohio finally got with the program and doesn’t have weird numbering any more for the UCC, at least for UCC Article 9) -- provides:

an account debtor on an account, chattel paper, or payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a notification, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor

And this is what my lender client proceeded to do.  Seems pretty straightforward, right?   However, the obligor on the note pledged as collateral balked at honoring the direct pay letter on the grounds that the guarantor had convinced them that a garnishment proceeding was necessary due to a statutory exception for "structured settlement payments". 

Special Structured Settlement Provisions.  The guarantor had argued that Ohio Rev. Code §1309.406(K) carved out a giant exception to the application of UCC Article 9 which required additional action before my lender client could realize upon its collateral.  That statute provides “[n]othing in this section shall supersede the provisions of sections 2323.58 to 2323.587 of the Revised Code.”

So now we go to the “killer” rule. Ohio Rev. Code §2323.581 adds additional requirements that must be met for a transfer -- which pursuant of Ohio Rev. Code 2323.58 includes an assignment, pledge, or grant of a valid security interest -- in “structured settlement payment rights” to be effective. It provides that no “direct or indirect transfer of structured settlement rights” is effective and no obligor on such an obligation is required to make payments to the “transferee” unless

• the “transferee” has provided the payee/borrower “and other interested parties” with certain detailed required disclosures detailed in Ohio Rev. Code 2323.582 BEFORE the payee “becomes obligated under a transfer agreement” AND
• the transfer has been approved in advance by the Court.

A "structured settlement" is defined by Ohio Rev. Code 2323.58(L) as "periodic payments of damages for injury to a person that is established by a settlement or a court judgment in resolution of a tort claim."  Thus, the unwary lender might come to believe its security interest has serious enforceability issues.  That would be wrong.

Remember the Definition of "Payee".  Iin this case, as in many others, you gotta read the small print.  The definition of "payee" -- upon which the exception of Ohio Rev. Code 1309.406(K) relies -- narrows the scope considerably of those structured settlement payments potentially excluded from the reach of a direct pay letter.  Pursuant to Ohio Rev. Code 2323.58(G), "payee" is an "individual" receiving payments "excludable from the individual's gross income under federal income taxation laws applicable to that individual".  According to the IRS, these payments arise from tort claims involving physical injuries or physical sickness and workers compensation claims.  26 USC 104.

Thus, while superficially perhaps a matter of concern for a lender, in reality, the language of Ohio Rev. Code 1309.406(K) only applies to payments related to personal injury claims.  So, happily for my lender client, we were eventually able to convince the note obligor to honor the direct pay letter.  The lessons to be learned?  First, make sure you follow a clever borrower's argument ALL the way to the end.  And, second, remember that promissory notes evidecing personalnjury settlements may  be vulnerable to enforceability challengs. 

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

Two situationa in particular are addressed:

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

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

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

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

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

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

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

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

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

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

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

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What's better than a guaranty or even a security interest or mortgage lien if you're worried about receiving payment?  A letter of credit, sometimes simply referred to as an LC, that's what.  Although most closely associated with international trade, a letter of credit can also be useful in more ordinary transactions as an alternative to a guaranty or pledge of collateral.  Click here and here for  examples of letters of credit 

A letter of credit transaction involves three different parties:

• Applicant/Customer - the party requesting the issuance of a letter of credit
• Issuer - the party, generally a bank, who issues the letter of credit promising to pay the amount of the letter of credit upon (1) presentation of documentation spelled out and required by the letter of credit; and (2) compliance with any other conditions set out in the letter of credit.
• Beneficiary - the recipient entilted to present the letter of credit and receive payment

It also involves three separate and distinct relationships among these partes:

• Underlying business transaction between the Applicant/Customer and the Beneficiary, often a sale of goods by the Beneficiary to the Applicant/Customer.
• Credit transaction between the Applicant/Customer and the Issuer, generally involving the agreement of the Applicant/Customer to reimburse the Issuer (often through a draw on an existing line of credit from the Issuer} if the letter of credit is presented and the Issuer pays the Beneficiary.
• Independent Contract  between the Issuer and the Beneficary in which the Issuer agrees to pay the Beneficary the amount stated in the letter of credit upon the happening of events referenced in the letter of credit and proper presentation of documentation required by the letter of credit

A letter of credit transaction is all about documents.  The Issuer is not required or even permitted to concern itself with the underlying business transaction between the Applicant and the Beneficiary.   The Issuer's only obligation is to examine documentation presented by the Beneficiary and determine if it is in compliance with what the letter of credit requires - strcit compliance.  To get paid, the Beneficiary must meet the terms of the letter of credit, including the language of aby certificate - EXACTLY. 

Here's how a letter of credit works.  It will of course have an issuance date and, usually, an expiration (sometimes called an expiry) date, although it s also possible for a letter of credit to be "perpetual". i.e. in effect until terminated.  There will also be a specified dollar amount which is often payable all at once, but may also be payable in more than one "draw". 

Typically, a letter of credit will have certain "documentary conditions".  These usually require the Beneficiary to present certain documents, along with the letter of credit, to the Issuer in order to get paid.  This might be something like an involce or other document pertinent to the underlying contract between the Applicant and the Beneficiary.. 

In addition, a letter of credit may often have "nondocumentary conditions", particularly when the letter of credit really is being used as a substitute for a guaranty or collateral.  Here, the letter of cfredit will require that a certification of some kind regarding a failure on the part of the Applicant.  The words and format used in the certification must be EXACTLY as specified by the letter of credit. 

In the international trade context, use of a letter of credit helps bridge the gap between buyers and sellers who are strangers to one another,    The Seller's credit risk of delivering goods to a distant and unfamilar buyer is minimized because the seller knows that if it ships the goods and otherwise complies with the requirements set out in the letter of credit, it need only present the letter of credit to the Issuer to be paid.  From the buyer's perspective, no payment is required until the goods have in fact been received.

A letter of credit can also be useful in other contexts as well.  For example, a letter of credit might be used in place of a security deposit in a lease.  it can also be used to secure other contractual obligations to pay or reimburse someone,   

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Teri Rasmussen has helped guide clients in making legally informed business decisions for more than twenty years.  Her pragmatic strategic thinking has enabled her to provide strong practical counsel and advice to businesses and their owners facing a variety of challenges and legal concerns. 

As an attorney with more than twenty-five years, Teri focuses her practice on business, corporate, commercial, and real estate law.    She concentrates her own practice on matters such as creditors' rights, business insolvency and bankruptcy, workouts and turnarounds, loan structuring, negotiation, and documentation, and commercial litigation.  She also assists clients with business acquisitions, mergers, and sales; business formation; debt and equity financing; contract review and negotiation; relations among business owners; real estate purchase and leasing; and other general business, commercial, corporate and real estate law issues.

To learn more about what Teri can do for clients in these areas, visit this summary of Practice Areas, or read About This Blog and My Approach to Lawyering.  You might also be interested in reading her post on this blog about Why Every Client Should Want an Attorney Who Blawgs.

Teri received her J.D. legal degree cum laude from the University of Michigan Law School where she was a member of the University of Michigan Journal of Law Reform Editorial Board, as well as serving as a research assistant to Prof. James J. White, a well recognized authority on the Uniform Commercial Code.  She is admitted to practice before the courts of all Ohio state and federal courts (including bankruptcy court), as well as before the United States Sixth Circuit Court of Appeals. 

Throughout her career, Teri has been actively engaged in the leadership of numerous professional and business organizations.  She is a Past Chair of the Columbus Bar Association Financial Institutions Committee and of the Ohio State Bar Association Banking, Commercial, and Bankruptcy Law Committee.  Currently Teri has been appointed to the membership of the Ohio State Bar Association Legal Ethics and Professional Conduct Committee.  She was also a cofounder of Women for Economic and Leadership Development (WELD) and served on its Board of Directors for many years.

Teri has also made strong contributions through her involvement in various other civic and community organizations.  She is an alumna of Leadership Columbus’s FOCUS Columbus program and of Leadership Dublin.  In addition, Teri is a Past President of the Columbus Chapter of Executive Women’s Golf Association and served on the Board of Governors for Leatherlips Yacht Club for several years.  She has also served on the Board of Directors for CATCO (aka Contemporary American Theatre Company) while it transitioned to Equity status and for the Central Ohio Chapter of the American Leukemia Society.

 To learn more about Teri, visit her bio on the website of Rasmussen Law Office or

Rasmussen Law Office offers representation to businesses, professionals, and individuals in many areas of law, including

• business, corporate,and commercial matters
• creditors' rights
• real estate
• general civil and appellate litigation

The Rasmussen Law Office serves business, professional, and individual clients in Central Ohio - including Bexley, Clintonville, Dublin, Gahanna, German Village, Grandview, Grove City, Hilliard, New Albany, Powell, Upper Arlington, Victorian Village, Westerville, and Worthington -, as well as throughout the Stats of Ohio.

This blog is not intended as legal advice as every situation differs and you should consult an attorney about your particular legal concern. This blog (as well as any comments to posts on this blog) is not an offer to represent you nor is it intended to form an attorney-client relationship.

• There are a few things I can do as a flat fee.  These would include one person LLC or corporation, simple promissory note and mortgage/security interest, and certain other basic services.

• Generally, I bill for my time  (and that, together with my experience and expertise gained over 25-plus years of legal prectice, is what I am ultimately offering to you for purchase) on an hourly basis.  I do it this way because (1) usually there are way too many variables for me to be able to give you a firm quote; (2) I don't get any more hours in the day than anyone else and once I've given those to one client, i can't give it to anyone else; and (3) that's the way it's mostly done in the law biz, and on this one, I suppose I've chosen not to rock the boat. 
  • My hourly rate varies depending on the complexity of what you are asking me to do.  It can range from $200 to $350 per hour.  You should probably plan on a rate of at least around $250 in most cases.  
  • I usually require payment of an initial retainer with new clients.  This varies from case to case and depends on the nature and complexity of what you are asking me to do.
  • In most cases, I DO NOT do the "first meeting" for free.  What I will do is meet with you for however long we need to take (within reason and generally assuming we're talking 1-1 1/2 hours, max 2 hours) for a set flat fee, usually $250, payable when we meet.  If you just "want to get acquainted" or size me up to decide if you want me to be your lawyer, ask me to lunch.  I have to eat anyway and I always like to meet new people.  Or catxh me at any of a number of networking events I attend. 

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