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Ohio Commercial Litigation: “Automatic stay” is not just an issue in Bankruptcy Court

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

We’ve all heard of bankruptcy being used as a shield to protect against creditors’ attempts at debt collection. However, in the practice of law especially, the automatic stay is no longer an issue reserved for those who file bankruptcy, nor does it exist solely within the confines of the bankruptcy courts. Sure, the bankruptcy court generally governs matters involving the “stay” but, particularly in our increasingly adversarial society, these issues tend to bleed over into other legal proceedings as well, such that every litigator (and perhaps every litigant) should be apprised of the ways in which the automatic stay could impact them and their claims.

The bankruptcy petition triggers the automatic stay – imaginary armor that then cloaks the debtor (the person who files bankruptcy), halting all collection efforts by creditors (those seeking to collect money from the debtor).  Uponfiling bankruptcy, a debtor is immediately protected by the automatic stay which prohibits, among other things, “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case. . . .” 11 U.S.C. § 362(a)(6). The automatic stay imposes on creditors an affirmative dutyof compliance. Sternberg v. Johnston, 595 F.3d 937, 943 (9th Cir. 2010).

In other words, once you file bankruptcy, your creditors (whether that be the telephone company merely seeking to collect a past-due bill, or someone intending to sue you on a $1 million tort claim) are no longer allowed to take any steps toward recovering that which they think you owe them, in court or otherwise. They cannot call you, they cannot send you a letter threatening action against you if you refuse to pay, they cannot file a lawsuit against you, and they cannot continue to pursue claims that are already pending against you without explicit relief from the bankruptcy court in which your petition is filed. Violating the automatic stay is a very serious offense that often results in an award of damages and attorney’s fees against the violating party.  11 U.S.C. 362(k).

Perhaps you represent a defendant in a contract case, your client filed for bankruptcy (invoking the stay), and the plaintiff’s attorney then serves you with discovery request asking your client to admit that he owes the money sought in the lawsuit. The automatic stay protects your client. Or, maybe you are a passenger who was injured in a car accident, and you are preparing to sue the at-fault driver (a debtor in bankruptcy) for reimbursement of medical expenses. The automatic stay likely prevents you from doing so.

In a practical sense, the affirmative duty of compliance placed on creditors even goes beyond just monitoring their own conduct to ensure that they are not violating the stay – it imposes a duty to police against others, namely courts, violating the stay, as well. This may seem a harsh result, but the Sixth Circuit has explicitly held that creditors cannot sit idly by and allow stay violations occur. See generally Wohleber v. Skurko, 2019 Bankr. LEXIS 653 (6th Cir. March 4, 2019).

In the Wohleber case, the husband-debtor was subjected to a post-petition sentencing hearing arising out of a pre-petition contempt proceeding (i.e., he failed to pay a property settlement previously ordered by a domestic relations court and the hearing was to determine his consequences). At the hearing, the debtor was put in jail until he paid the amount ordered by the domestic relations court (also pre-petition). The husband-debtor later argued that the wife-creditor and her attorney violated the automatic stay by allowing the sentencing to proceed. The bankruptcy court, initially, rejected this argument on the grounds that neither the wife-creditor, nor her attorney took any affirmative action to collect the debt post-petition. However, the Sixth Circuit reversed, holding that the wife-creditor and her attorney had an affirmative duty to “prevent the use of the sentencing hearing and [subsequent confinement] of the [debtor-husband] to coerce payment of the dischargeable property settlement.” Id., at *44.

In sum, the automatic stay is not a concept reserved for bankruptcy courts and the attorneys who practice primarily within it. Instead, it intersects with nearly every area of the law and, frequently, in litigation.  Because the stakes are so high for stay violations and missteps can be costly, it is important that creditors (or potential creditors, or their counsel) are in-tune with what the stay means and the type of conduct it prohibits. It is likewise important for debtors to know their rights so that they can recognize improper conduct if and when it occurs to their detriment.

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For assistance with all of your commercial litigation needs, contact Casey A. Taylor at 513.943.5673 or Bradley M. Gibson at 513.943-6661.

The best expert witness cross examination question ever!

Author By Christopher P. FinneyPosted on

As I meet with clients to explain the expensive and drawn-out odyssey that litigation can become, it can be a challenge to explain the mind-bending mental gymnastics that attorneys can force parties to endure.  Things that are painfully logical and simple to ordinary folks (laymen, non-attorneys) can be expensive and difficult to establish in court as litigants want to argue over absolutely everything.

The best example I can give of this is an exchange I had in a trial held before Federal District Court Magistrate Litkovich in January of this year.

This trial was an MSD claim relating to the MSD’s administrative claims process for basements subject to sanitary sewer backups.  This case was an extreme instance in which our client experienced more than 9′ of effluent that came into his basement on a regular basis, and MSD simply refused to stand behind its obligations under a consent decree arising from prior litigation with the US EPA.

To win, we had to prove these things: (a) sanitary sewer “surcharge” flooded his basement, (b) on multiple occasions, (c) that MSD was unable to develop an “engineering solution” that would stop the flooding, and (d) that he had made a claim to the MSD hotline within 24 hours after an incident.

The flooding was so severe and repeated that these elements were easily proved.  Yet for two years, MSD had refused to negotiate a settlement in good faith.  They insisted upon a trial, even though there was no factual issue in dispute; from our perspective, there was simply nothing to try.

So, MSD’s attorneys adopted the defense at the hearing that our client, the Plaintiff, could not prove that it would actually rain again:

Tim Sullivan of Taft, Stettinius & Hollister represented MSD at the hearing and here he was questioning my client’s expert witness:

Q. And if we had no rain, if climate change really turns out to be as dire as some people tell us, you would agree this property would have no problem in the future?

A. If there was no rain?

Q. Right, or not enough rain to cause any surcharge from any part of the Sewer District system.

A. Yeah, I would think the property would be — certainly you could take another look at living there and going there if you have no risk of backups, any kind of backup.

I must admit it was a creative question: “What if it never rains again?”  Brilliant! And we already had our lineup of witnesses named.  Who could testify with requisite expertise that, in fact, Cincinnati would experience a rain event in the future?

We ultimately settled the case.  But after 30 years of doing this I once again learned the hard lesson that lawyers can argue over absolutely anything.

And for the record, since this hearing, Cincinnati has experienced 15″ in rainfall more than is average for this point in the year. Yes, Virginia, it is going to rain again.

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For help with your litigation challenges, call Bradley M. Gibson at 513-943-6661 and for help with MSD claims call attorney Julie M. Gugino at 513-943-5669.

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A copy of the transcript excerpt in this exchange is attached here.  The quoted language is at page 19, starting at line 13.

 

Finney Law Firm successfully challenges Harbour Portfolio Advisors in land installment contract litigation

Author By Christopher P. FinneyPosted on

One of the many unfortunate outcomes of the subprime mortgage crisis has been that unscrupulous predatory investors scooped up broad portfolios of real estate at very low prices, and then re-sold them in troubled neighborhoods to unqualified buyers on land installment contract.

This had the dual effects of victimizing unknowledgeable and unqualified buyers and keeping many times unoccupied and dilapidated properties from re-entering the stream of commerce with qualified buyers.

One of those predatory investors has been Harbour Portfolio Advisors.  Their tactics have spawned a New York Times article on their predatory practices, a law suit from the City of Cincinnati that resulted in an injunction against their practices from Judge Robert Ruehlman (Hamilton County Case No. A1702044) and an ordinance with new land installment contract regulations from the City of Cincinnati.  It takes quite a track record to spur that kind of remedial activity.

The routine practiced by Harbour Portfolio appears to be:

  1. Selling the property to unknowledgeable and unqualified buyers on land installment contract,
  2. Receiving a down payment and some monthly payments from the buyers.
  3. Once one payment is missed, declaring the buyers in default and taking the property back.
  4. If the buyer is able to perform, refusing to cooperate in the conclusion of the sale, eventually forcing a default from the buyer, and moving back to Step #3.  (This is certainly what our client experienced)

Our firm recently represented a victim of Harbour Portfolio’s predatory practices, and obtained a judgment from Judge Jody Luebbers.  The result was that without further payment our client obtained clear title to the property, obtained a damages award from Harbour Portfolio, and also an award of his attorneys fees from Harbour Portfolio.

If you have been victimized by the unscrupulous tactics of Harbour Portfolio in Ohio or Kentucky or other predatory lenders or sellers, contact either Chris Finney (513-943-6655) or Julie Gugino (513-943-5669).

We are glad to “Make a Difference” in your property or lending dispute.

City of Cincinnati enacts new Land Installment Contract law

Author By Christopher P. FinneyPosted on

The City of Cincinnati has enacted a new series of restrictions on property owners selling under land installment contracts as Chapter 870 of the Cincinnati Municipal Code.

It appears to be a response to the questionable tactics of a single large investor who bought a significant number of properties in the subprime mortgage crisis, and then resold portions of the portfolio to unqualified buyers on land installment contract.  This investor/seller is Harbor Portfolio Advisors, against whom this firm has successfully litigated.  You may read more on that here.

The new ordinance provides:

  • Before selling a property on land installment contract, the vendor must first obtain a certificate of occupancy for the property (CMC 870-03).
  • The vendor must both deliver to the certificate of occupancy to the vendee and record the land contract within 20 days (CMC 870-04).
  • The vendor may not require the vendee to sign a quit claim deed to the vendor at the time of execution of the land installment contract (CMC 870-07(d)).
  • The name listed on the records of the Auditor is presumed to be the owner for purposes of enforcing the ordinance.
  • The remedies under the Ordinance include rescission of the land contract (meaning the vendee can get paid back to him sums paid thereunder), and actual damages, statutory damages of $5,000 per violation and the vendee’s attorneys fees incurred in pursuing his remedies under the ordinance.

For more information about enforcing your rights under the new land installment contract statute or suing Harbor Portfolio Advisors in Ohio or Kentucky, contact Chris Finney (513-943-6655) or Julie Gugino (513-943-5669).

Other than Never, When to Sign a Contract Without Reading

Author By Eli N. Krafte-JacobsPosted on

Nearly every aspect of the modern world is regulated, in one manner or another, by the use of contractual agreements. As a result of their ubiquity, it is unrealistic to expect the average person to read every word of every contract they sign. To be clear, under no circumstance do we advise signing a contract without reading it, but one must discard reality to believe that such advice will be received, much less heeded. That said, the purpose of this article is to provide guidance for the average person to use when faced with a contract, particularly in light of the general propensity to sign contracts without reviewing them.

Ordinary contracts and adhesion contracts

Insofar as this article is concerned, the most prominent aspect of contract law is the distinction between ordinary contracts and adhesion contracts. Consider ordinary contracts to be agreements between two or more parties that are reached by negotiation. For example: (i) a real estate purchase contract where one party must sell his or her property in exchange for a negotiated purchase price or (ii) an employment contract where one party must perform work in exchange for negotiated income and benefits. As these contracts are bargained for, the parties need to be absolutely sure that the terms agreed upon are, in fact, the terms contained in the written agreement. This concern is exacerbated by the endless spectrum of legal clauses that can be drafted into a contract. As a result, the only way to achieve certainty is to read the contract, and consult with legal counsel regarding any provisions that: (i) you do not understand, (ii) you are not comfortable with agreeing to, and/or (iii) are contrary to your understanding of the agreement of the parties.

On the other hand, adhesion contracts are best defined as agreements between two or more parties wherein the terms are set by one party without negotiation. Examples of adhesion contracts include: insurance contracts, cell phone provider agreements, loan agreements, etc.

Less risk in Adhesion Contracts

Again, this is not advice to sign contracts without reading, but, for those persons who are going to do so anyway, it is worth noting that between the two types of contracts, adhesion contracts pose less concern for a variety of reasons including, but not limited to, the following:

1. If you want the product being offered, then you have to agree to the terms being offered. Why? Because you have no bargaining power to negotiate them. For example, if you walk into Verizon and ask them to change a provision in their cell phone provider agreement, then you will, in all likelihood, leave the store without a cell phone plan.

2. Countless people before you have signed an agreement with identical or nearly identical terms. This does not in and of itself mean that a contract is risk free; however, continuing with Verizon as an example, it is reasonable to equate the number of long term Verizon customers with the acceptability of Verizon’s contractual terms.

3. Other than notice provisions (i.e., requirements to notify other parties upon the occurrence of a triggering event) and negative covenants (i.e., promises to refrain from doing something), consumer obligations under adhesion contracts typically revolve around money to be paid in exchange for a service or product. In other words, the consumer side of an adhesion contract is less likely to have obligations beyond the payment of money.

4. Analyzing a dozen or more pages of legalese can be a burden for the most brilliant of legal minds, so the idea that the average person can read through the same while standing at a check-out counter is nothing short of absurd. While every contractual provision is important, the average consumer is mainly concerned about the cost of the product or service. Thus, the decision to execute a contract is more often based on the consumers’ desire to obtain the service or product rather than their agreeability to convoluted contractual provisions.

5. Unconscionable contract provisions are not enforceable. A provision is unconscionable if it is substantively unfair or oppressive to one party, or otherwise represents a degree of unreasonableness. If there are unconscionable terms in a contract, then a court will either strike the provision from the contract or declare the contract void in its entirety.

Ohio Consumer Sales Practices Act

In addition to those reasons stated above, Ohio consumers are protected under the Consumer Sales Practices Act (the “CSPA”), which states among other things that suppliers cannot commit unconscionable acts or practices in connection with a consumer transaction. A supplier is defined as “a seller, lessor, assignor, franchisor, or other person engaged in the business of effecting or soliciting consumer transactions, whether or not the person deals directly with the consumer.” To determine if a transaction or contract is unconscionable, CSPA asks if the supplier: (i) knowingly took advantage of a consumer because of the consumer’s physical or mental infirmities; (ii) charged a price that substantially exceeded the price of similar property or services that are readily obtainable; (iii) knew the consumer could not receive a benefit from the property or services; (iv) knew the consumer was unable to pay; (v) required consumer to enter a transaction where supplier knew the terms were substantially one sided; (vi) knowingly made a misleading statement that the consumer was likely to rely on, or (vii) refused to make a refund for a return unless there is a sign posted at the establishment stating such refund policy.

The CSPA also regulates suppliers by proscribing unfair and/or deceptive acts in connection with consumer transactions. Moreover, CSPA lists a series of acts and practices that are per se deceptive. That list includes, but is not limited to, a supplier’s false representation to a consumer of any of the following: (i) a product or service contains benefits that it does not have; (ii) a product or service is of a particular grade or quality, when it is not; (iii) a product is new or unused, when it is not; (iv) the product or service is available for a reason that does not exist; (v) a replacement or repair is needed, when it is not; and (vi) that a price advantage exists, when it does not. If a supplier runs afoul of this statute—or any CSPA provision—the consumer may bring a cause of action for the actual damages he or she incurred plus an amount not to exceed five thousand dollars ($5,000.00).

Conclusion

Ultimately, you should read every contract that you sign, regardless of any representations or verbal agreements. It does not matter what you agreed to verbally if you signed a document that states otherwise. This article is not intended and shall not be construed as providing advice to sign documents without reading them. Rather, this article merely offers a pragmatic view of the all-too-common practice of signing contracts without reading them.

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

Author By Christopher P. FinneyPosted on

Someone owes you money.

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

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

The challenge

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

Collectibility

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

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

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

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

Liability

Ahhh, liability.

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

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

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

Damages

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

Collection

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

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

Tools for enforcement

Our tools to force payment of a legal judgment include:

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

Creative fee relationships

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

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

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

Conclusion

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

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

Foreign Corporation Primer: Register before filing suit

Author By Finney Law FirmPosted on

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

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

R.C. 1703.03.

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

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

R.C. 1703.29.

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

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

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

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

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

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

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

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

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

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

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

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

General Contract Principles

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

Standard contract language

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

Common law when contract is silent

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

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

Duty of contribution from co-makers

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

Conclusion

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

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

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

Author By Christopher P. FinneyPosted on

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

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

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

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

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

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

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

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

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

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

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

 

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

Author By Christopher P. FinneyPosted on

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

Somewhat surprisingly, the answer can be “yes.”

Hypothetical sale of stock

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

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

OK, but what about real property?

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

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

The basis for fraud?

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

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

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

The peril for the seller

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

Conclusion

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

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