Gunfire Leaving Your Property? You Might be a Nuisance

Ohio’s Twelfth District Court of Appeals issued an interesting opinion earlier this year that wove together issues of statutory interpretation, expert testimony, property rights and nuisance. The end result? If you have bullets flying off your property, you might be strictly liable for nuisance.

 

Before the court in Batelle Memorial Inst. v. Big Darby Creek was a landowner – Batelle Memorial Institute – that claimed gunfire from an adjacent shooting range was flying onto its property endangering employees and visitors. Batelle sought, and was granted, a preliminary injunction in the trial court. 

 

One interesting issue on appeal was whether a Batelle employee could not only testify as to his first-hand knowledge of the gunfire, but also offer his opinion as to where the gunfire originated from based on bullets found on Batelle’s property. Normally such opinion is reserved for expert testimony – but Batelle was in luck. Batelle is a research facility that, in part, researches national security and “ordnances.”  The employee’s testimony was admitted by the trial court, and upheld on this appeal, as being “helpful in determining the point of origin of that particular bullet.”

 

On the fundamental issue -- whether the trial court properly granted an injunction against the shooting range’s alleged nuisance (bullets flying onto the neighbor’s property) – the Court again ruled in Batelle’s favor. The nuisance finding required that the shooting range failed to exercise “due care” in preventing gunfire from leaving its property. The trial court referred to an Ohio Administrative Code section governing shooting ranges, that states shooting ranges should substantially comply with NRA safety guidelines. Those NRA safety guidelines, in turn, state that all projectiles must be confined to the shooting range property. Thus, the shooting range was “negligent” for the bullets leaving its property, regardless of how or why they left, and regardless of any precautions taken by the shooting range. The court’s incorporation of the NRA manual essentially converted nuisance to a strict liability offense, more along the lines of trespass. 

 

A very apropos case if you happen to own a shooting range: Make sure bullets don’t leave your property, because you can be negligent regardless of how extensive your precautions. Outside the shooting range world, it’s simply an interesting example of how common law and statutes can interplay to create an unexpected result.

Necessity for Fair Housing Act Compliance Amplified by Recent Court Rulings

The Situation:

Certain covered dwellings that are not designed or constructed in strict compliance with the Fair Housing Act are increasingly subject to suit, with strict liability befalling developers, designers, and contractors alike.  In fact, contractors are strictly liable for FHA violations even if they correctly follow a designer's noncompliant drawings.  Further, courts across America are consistently holding that potentially liable parties cannot sue each other for alleged contribution for a FHA defect, which enhances exposure for those sued directly by FHA protected class  members.  Needless to say, the financial risk of FHA noncompliance is grave.   

      



 

 

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"Strategic Default" Becoming a Popular Exit Strategy

With the current housing crisis, more individuals are voluntarily choosing to cease payments on their mortgages. This scheme, known as “strategic default,” is most common where the mortgage balance exceeds the home value. The phenomenon has fueled a rigorous debate, with some arguing it is immoral to default on a mortgage which is still affordable, and others taking the position that for some homeowners the “benefits” of willingly defaulting outweigh the consequences. 

A cost-benefit analysis as to whether a homeowner should strategically default is not as simple as it seems. Initially, a borrower’s credit score can plummet as much as 160 points. Although a foreclosure will stay on a credit score for seven years, its impact will lessen with time. Another risk depends on whether a homeowner resides in a non-recourse or recourse state. Non-recourse states forbid lenders to pursue borrowers for the money owed which exceeds the value of the home. Recourse states allow lenders to sue borrowers; yet, the overwhelming amount of foreclosures has lenders scrambling to stay afloat without the problem of pursuing defaulting homeowners. Finally, many defaulting homeowners wonder if they will be able to buy a home again. With a poor credit score, it can be difficult to buy a house. But financial institutions across the nation specialize in “mortgage repair” which targets homeowners who have recently defaulted on a mortgage.

Even with the uptick in the current crisis, it is surprising how few homeowners choose to default strategically. Luigi Zingales, author of “The Menace of Strategic Default” in a recent issue of the City Journal, argues this is due to moral implications: “the idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded. What does prevent people from strategic default, it seems, is their sense of what’s right.” Zingales feels social norms have a direct impact on whether an individual chooses to default or not; i.e. knowing someone who has done it makes you more likely to do it.  

On June 10, in response to the wave of mortgage defaults (strategic or otherwise), a Federal Housing Administration (FHA) reform bill passed the U.S. House of Representatives with a 406 to 4 vote. The FHA Reform Act (H.R. 5072), among other goals, seeks to withdrawal FHA approval from lenders with abnormally high default rates.  The bill has organizational support from those such as Robert E. Story, Jr., Chairman of the Mortgage Bankers Association, who hopes the bill “will allow FHA to address lender enforcement without discouraging responsible lenders from participating.”

Although homeowners may individually benefit from strategically defaulting, it raises an additional obstacle to the recovery of the broader housing market.  When a neighbor defaults, home values in the vicinity plummet and mortgage prices increase as lenders cover default costs. Yet, what is to prevent an individual owner making a rational financial decision that it is better to breach than continue paying on a mortgage balance that substantially outweighs home value?  Perhaps the idea of opportunistic, or willful, breach has trickled down to the American consumer.

Supreme Court Rules Beach Additions Not Compensable Takings

Truckloads of sand will begin cascading across hurricane-battered beaches along the Destin and Walton County shorelines, thanks to a recent 8-0 decision by the Supreme Court. Coastal homeowners originally sued Florida arguing that the Beach Erosion Control Program (BECP) would cause the value of their homes to decline, turning their “oceanfront” property into “ocean view” property. Much to the dismay of residents, the Court ruled that the state may extend the eroded shorelines without compensating the homeowners for loss of private property.

The homeowners in Stop the Beach Renourishment v. Florida Department of Environmental Protection (#08-1151) claimed that widening the beach without compensating the residents amounted to an unlawful taking of private property for public use. Although residents believed their land was unlawfully taken, a state law permits Florida to add sand to eroding beaches. Under this law, the state is permitted to increase the size of the beach and claim ownership of the new addition. All eight justices (Justice Stevens recused himself, likely because he owns oceanfront property in Ft. Lauderdale which is also under consideration for a BECP project) agreed that such action did not constitute a compensable taking.  Justice Scalia, writing for the Court, noted that the case turned on two Florida property law principles:  “First, the State as owner of the submerged land adjacent to littoral property has the right to fill that land, so long as it does not interfere with the rights of the public and of littoral landowners. Second, if an avulsion exposes land seaward of littoral property that had previously been submerged, that land belongs to the State even if it interrupts the littoral owner’s contact with the water.” The Court concluded that since “the Florida Supreme Court’s decision did not contravene the established property rights of the petitioner’s members, Florida [did not violate] the Fifth and Fourteenth Amendments.”   

Doug Kendall, spokesman for the Constitutional Accountability Center, agreed with the decision, stating that “the Court’s ruling supports Florida’s efforts to restore eroded beaches and preserves the ability of state and local governments to respond to changing environmental conditions. It is crucially important that the government have the authority to step in to protect our beaches and coastal communities.”

While some may see this as an extension of recent Supreme Court decisions -- ala Kelo -- expanding the right of government to take private property for public use, Stop the Beach is actually a unique case that will likely have little impact on future takings jurisprudence.  It arose from distinctive circumstances addressing littoral property under a Florida statute permitting erosion control actions by the state.  And when Scalia sides with the state in a takings case, you can be sure the scope of victory is limited.

Performance and Payment Bond for Public Project Deemed Discretionary

In the much-publicized "Kenwood Towne Place" litigation in Cincinnati, which involves over $40MM in lien claims, presiding Judge Beth Myers issued a Decision and Entry that disposed of subcontractor claims against the Port Authority of Greater Cincinnati (the Public Authority involved with the project).  The Court dismissed the subcontractors’ claims for takings and negligence. 

One aspect of Judge Myers' decision makes it glaringly important for contractors of all shapes and sizes to perform independent assessments of front-end protection on a public project: the Court determined that the requirement of a performance and payment bond (or lack thereof in this case) was a matter of discretion for the Port Authority and, consequently, not mandatory under Ohio law.

To reach its Decision, the Court focused on Sections 4582.31 (specific to port authorities) and 153.54 (applies to public projects) of the Ohio Revised Code.  The Court determined that Section 4582.31 gives the Port Authority discretion whether to require competitive bidding and whether to require security--"As a matter of law, it had no duty to require a performance or payment bond."  The subcontractor claimants relied on Section 153.54, which requires performance bonds in competitive bidding, and the competitive bidding provision of 4582.31.  But the Court found that the Kenwood Towne Place litigation is governed by the discretionary provisions granted to port authorities because the project was funded exclusively from bond proceeds and special funds (bond discretionary) instead of general revenue funds or funds raised through taxation (bond mandatory). 

Among other things, the Court summarily dismissed the subcontractors' common law claims for negligence because, under Ohio law, when a statute imposes a duty upon a public entity which is intended for the public good, the failure to adequately perform the duty does not permit a private right of redress for injuries caused by that failure. The Court's ruling may come as a surprise to many contractors in the public sector.  Notwithstanding, Judge Myers' decision should be a lesson to all that significant diligence for adequate assurance of payment should not be delegated or accepted at face value.  The current economic climate places that duty at an all-time high for those contracting for work in the public arena. 

 

Cognovit Update

Ohio is one of the few remaining states that still enforce cognovit provisions in promissory notes and other loan documents. A cognovit provision allows a creditor to take judgment immediately against a borrower upon the borrower’s default without having to endure the time, expense, and risk of a lawsuit. Cognovit provisions are only enforceable in commercial transactions.

Recent Ohio case authority has addressed the problems that occur when a lender seeks to take a cognovit judgment for principal amounts owed under loan documents and attorney’s fees, when the attorney fees are not yet liquidated, i.e., established in a definite amount. In one recent case, the lender sought a cognovit judgment in the amount of the note plus "reasonable attorney fees." As is commonplace, the judgment debtor, who had guaranteed corporate obligations, challenged the cognovit judgment. 

In that case, the cognovit judgment was not a final, appealable order because it did not fix a figure for attorney fees. The judgment debtor would probably have been better off not forcing the issue by filing motions and appeals. Instead, they should have either sat still or challenged the lender to execute on the judgment, since Ohio law provides that a lender cannot execute on a judgment that is not a final order.

 

The take away point is that it is better practice for the lender to split the fixed portion of the obligation (i.e. the promissory note or guaranty obligation) and the attorney fees into two separate orders, if the lender does not wish to assign a definite amount of attorney fees when the lender takes judgment. The judgment on the promissory note or guaranty should also state that there is no just reason for delay, per Ohio Civil Rule 54(B). The lender can then present the judgment entry for the attorney fee portion once the amount of the fees is fixed. Whether you are a borrower or a lender watch your cognovits and continue to police your loans !

Power(less?) of Attorney

One of my business law professors often started the class with an anecdote that had nothing to do with anything on our syllabus. One morning he entered the class and told of the frustrations he had in trying to execute a deed on behalf of his wife who was out of the country and for whom he held a perfectly drafted and executed power of attorney. Alas, the title company refused to accept the deed. 

I have had issues of power of attorney pop up in three different contexts of my practice recently. First, two underwriters refused to insure title to a property because the vesting deed was a transfer on death deed (ugh, see my prior comments about the dreaded transfer on death deed) executed by a power of attorney. Although there is no statutory prohibition with respect to the validity of such a transfer, initially, neither underwriter would insure title. One underwriter was swayed by the fact that the deceased’s will provided the same disposition for the property as the deed (although with the hassle of probate), the other underwriter was unmoved. 

 

Second, it is common for commercial leases to provide that if a tenant refuses to execute a tenant estoppel or a subordination agreement, then the landlord has a power of attorney to execute the documents on behalf of the tenant. When I represent tenants, I regularly strike this language. However, practically speaking, lenders will not accept documents executed by a power of attorney. With respect to estoppel certificates, the lenders already have the information from the lender—they want to hear directly from the tenant. With respect to the subordination, using a power of attorney leaves open too many openings for the tenant to push through in the event the subordination becomes an issue in the future. For example, a judge may find that the power of attorney should have been recorded when given or may refuse to enforce certain provisions for equitable reasons which the judge may have been more likely to enforce had the tenant been the party executing the subordination directly.    

 

 

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Losing Priority: The Risk of Noninsider Equitable Subordination

Following an era of relaxed standards for issuing loans, lenders must be aware of a bankruptcy court’s ability to subordinate liens for equitable reasons. On May 13, 2009, in In re Yellowstone Mountain Club, the Bankruptcy Court for the District of Montana issued an order subordinating the secured lender’s $232 million claim below the (i) debtor-in-possession financing; (ii) administrative fees; and (iii) the unsecured claims. Section 510(c) of the Bankruptcy Code authorizes a bankruptcy court to subordinate a claim for equitable purposes, but it provides little insight into the reasons that would justify this harsh remedy. For non-insider claimants like the senior lender in In re Yellowstone, subordinating a claim is a drastic measure that bankruptcy courts will rarely utilize. But the lender’s conduct, in issuing a $375 million syndicated loan with little financial due diligence and far in excess of the borrower’s ability to repay, “shocked the conscience of the Court.”

The lender issued a $375 million loan to the Yellowstone Club, a high end development company controlled by Timothy Blixseth through Blixseth Group, Inc., the majority shareholder. The lender marketed its product as the equivalent of a home-equity loan, and Blixseth treated it that way, taking large distributions from Yellowstone that he never repaid. Although Yellowstone was unable to repay its debt, the lender benefited because it had obtained a $7.5 million fee for closing the loan and had unloaded portions of the loan to the other syndicates. The bankruptcy court, finding the practices tantamount to predatory lending, determined that equity dictated subordinating the loan.

 

Lenders should be mindful of a court’s power to subordinate claims, even if it is rarely used. Although the bankruptcy court withdrew this opinion because the parties had reached a settlement on the issue, this case is still instructive for creditors. It illustrates that bankruptcy courts can use their own discretion to determine whether a lender has indulged in unsavory lending practices, a troubling thought to secured creditors everywhere. Nonetheless, equitable subordination for non-insiders is rare (it almost never happens), and lenders that employ responsible lending practices are unlikely to ever encounter this problem. 

The Lake Erie Shoreline, Landowner Rights, and the Public Trust - Round 2

In December 2007, a Lake County Common Pleas Court judge issued a landmark decision holding, among other things, that an owner of real estate that touches Lake Erie owns title extending as far as the water’s edge. State ex rel. Merrill v. Ohio Dept. of Natural Resources (2007), Lake County Common Pleas Case No. 04CV001080. Lake County is one of eight Ohio counties which contain Lake Erie shoreline.

On August 21, 2009, the Court of Appeals for the Eleventh Appellate District affirmed that holding in State ex rel. Merrill v. Ohio Dept. of Natural Resources, 2009-Ohio-4256. In particular, the Court of Appeals determined “that the waters and submerged bed of Lake Erie when under such waters is controlled by the state and held in public trust, while the littoral owner takes fee only to the water’s edge.” 2009-Ohio-4256 at ¶129. The Court of Appeals reasoned that “[t]he water’s edge provides a readily discernible boundary for both the public and littoral landowners.” 2009-Ohio-4256 at ¶128. The actual water’s edge, or shoreline, is the line of contact of a body of water and the land between the high and low water marks. 2009-Ohio-4256 at ¶¶97 and 127. 

 

In reaching its decision, the Court of Appeals reviewed appeals by environmental organizations representing members who make recreational use of the shores of Lake Erie, and cross-appeals by individual landowners and a non-profit corporation representing owners of littoral property on Lake Erie. In an interesting twist, the Court of Appeals found that the attorney general lacked the authority to pursue an appeal on his own behalf and ordered the state of Ohio’s assignments of error and briefs stricken.

 

The Court of Appeals did vacate that part of the trial court’s decision whereby the trial court attempted to reform any deed granting to its owner land extending lakeward of the water’s edge. The Court of Appeals found the issue of reforming the deeds was not before the trial court and, therefore, the parties had not been afforded the opportunity to argue their positions. 2009-Ohio-4256 at ¶103.

 

Any party wishing to appeal the decision must file a notice of appeal to the Supreme Court within 45 days from the entry of the Court of Appeal’s judgment.

Foreclosure Rescue Scams Proliferating

Where there’s trouble, there’s trouble. As a growing number of homeowners have defaulted or neared default on their mortgages, numerous schemes have cropped up taking advantage of their willingness to do whatever it takes to save their homes. 

 

The Court in State v. Cicerchi, 2009 Ohio 2249 (Ohio Ct. App. 2009) took the time to explain one of the more common plots:

 

One all-too common scam occurs when an individual or company identifies an at risk homeowner and misleads the homeowner into a "temporary" transfer of the deed to a third party with good credit. The third party then purchases the property and "leases" it back to the homeowner. The scammer convinces the homeowners that they can "refinance" their home using the third party's good credit. The homeowners are led to believe that they will pay "rent" on the home and once their credit is rehabilitated, they will get the title to their house back.  The homeowners then lose title to their homes, while the perpetrator profits by remortgaging the property or pocketing fees paid by the homeowner. Rarely do the homeowners ever regain title or receive any benefit from the sale, and often lose any equity that may have been in their home.

 

In Cicerchi, the defendant perpetrated a similar fraud and was convicted of misdemeanor theft, securing writings by deception, and telecommunications fraud. On appeal, the Court overturned the securing writings by deception conviction due to insufficient evidence. 

 

Earlier this year, the U.S. Department of the Treasury announced a partnership with several state and federal agencies to combat these mortgage-rescue frauds. The focus of the partnership is to identify offending companies and disseminate information to potential victims. The Federal Trade Commission and Office of the Comptroller of the Currency have each published a helpful bulletin on the variety of scams that can occur. 

 

The obvious victims are homeowners in a situation where they require assistance to perform under their loan or otherwise come to an amenable resolution with a lender. But fraudulent foreclose rescue companies are also an impediment to banks because they commonly tell borrowers not to contact their lender or not to enter workout discussions. Banks are left in the dark until it’s likely too late. Further, the “fees” borrowers pay to participate in the scam could otherwise be paid to the lender for amounts due on the loan. Mortgage lenders would be well advised to contact distressed borrowers as soon as possible to notify them of potential scams and initiate workout negotiations. 

 

Follow the (Note's) Instructions

Courtesy of DailyHaHa.com  http://www.dailyhaha.com/_pics/notice_the_notice.htmA helpful reminder to lenders – if you’re going to foreclose, read the note and mortgage and do what they say. In a recent Ohio Court of Appeals case, the bank failed to follow these instructions and was rewarded by having its foreclosure complaint dismissed. 

The borrower missed a payment on her mortgage and the bank sent a default notice via certified mail. When the past due amount was left unpaid, the bank foreclosed. Seems like a run-of-the-mill foreclosure case, right? Not quite, because the subject Note contained the following language: “Any notice that must be given to me under this Note will be given by delivering it or by mailing it by first class mail to me at the Property Address.” The borrower denied that she received the notice and, in fact, the certified mail envelope was returned to the bank as “unclaimed.”

 

Based on the express language of the Note (the Mortgage contained similar language), the Court rejected the bank’s arguments that it satisfied the notice requirements. The Note gave two options – delivery or mailing first class. There was no evidence the notice was actually delivered, and any presumption of delivery never arose because there was evidence, i.e. the returned envelope, that the notice was not delivered. The bank never mailed the notice by first class mail. The fundamental step of choosing the best mail service method could have saved the complaint. 

 

This example continues a trend toward more rigorous review of lenders’ methods in foreclosure cases. From requiring proof of note ownership, to mandating alternative dispute resolution and dismissing cases under a res judicata analysis, courts have become a more borrower-friendly environment as the foreclosure crisis has progressed. As judges cast an increasingly skeptical eye upon each foreclosure action that appears on the docket, it is critical that lenders pay attention to the smallest, seemingly insignificant details of the process. 

Lien on Me: Strategies for Resolving Mechanics' Lien Claims

A mechanics’ lien claim can give the contractor, subcontractor or material supplier making the claim a significant amount of leverage over a property owner in a payment dispute. This makes sense, of course, because the concept behind mechanics’ lien law is to provide some assurance that people will receive payment for work and materials they provide to improve real property. But what can the owner do where the claim for payment is disputed and the mechanics’ lien threatens to put the owner in default of its mortgage covenants or disrupt a sale or refinancing of the property?

When there is no external pressure from a lender or pending sale of the property, the owner does not necessarily need to do anything to address a lien. Ohio mechanics’ liens are valid only for a period of six years from the date of recording. If the owner believes the lien is invalid and therefore unlikely to be foreclosed upon, the owner can simply wait six years until the lien expires. 

 

If, however, the lien needs to be removed prior to the expiration of the six-year period, the owner has several options. Ohio’s mechanics’ lien law is complex and contains many traps for the unwary that may render a mechanics’ lien invalid.  For instance, on commercial projects, a mechanics’ lien claimant only has 75 after the last date of work in which to file the lien affidavit with the recorder’s office. The lien must then be served upon the owner or owner’s designee within 30 days. Failure to meet either of these deadlines will render the lien invalid. 

 

Another stumbling block for potential lien claimants occurs when the owner has recorded a notice of commencement (which the owner typically should). The recording of the notice of commencement triggers an obligation on behalf of subcontractors or material suppliers to serve a notice of furnishing upon the owner in order to preserve their right to claim a lien. Check to see that a notice of furnishing was properly served by the lien claimant. If not, the claimant may have lost the right to file a lien. Note that the requirement to serve a notice of furnishing does not apply to someone who has a contract directly with the owner. 

 

 

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Ohio Lenders Precluded from Bringing Third Complaint on Same Note

 

In U.S. Bank National Association  v. Gullotta, 120 Ohio St 3d 399, the Ohio Supreme Court decided that multiple actions under the same note and mortgage are subject to the two-dismissal rule and res judicata preclusion. The decision could have far-reaching implications for lenders seeking to workout loans with troubled borrowers.   

The history of the case is important to understanding its impact. In June 2003, Giuseppe Gullotta entered into a note and mortgage with MILA, Inc., which assigned the note to U.S. Bank. In April 2004, U.S. Bank filed a foreclosure complaint for the total principal due on the note, plus interest from November 1, 2003. It voluntarily dismissed this complaint in June 2004. In September 2004, U.S. Bank filed a second identical complaint, except with interest running from December 1, 2003, which it also voluntarily dismissed in March 2005. In October 2005, U.S. Bank filed a third foreclosure complaint on Gullotta’s note and mortgage. After Gullotta filed a motion to dismiss, U.S. Bank amended its complaint to seek interest only from April 1, 2005 (the first missed payment date after its second dismissal).

Ohio Civil Procedure Rules state that “a notice of dismissal operates as an adjudication on the merits of any claim that the plaintiff has once dismissed in any court.” A second dismissal is with prejudice and res judicata preclusion takes effect. Under a res judicata analysis, any claim “arising out of the transaction or occurrence that was the subject matter of the previous action” is barred. 

The Court held that each missed payment under the same note and mortgage does not give rise to a new claim, and therefore U.S. Bank’s two earlier dismissals precluded a third action. It premised this holding on four critical facts: 1) the underlying note and mortgage never changed, 2) the bank accelerated the payment upon initial default and demanded the same principal payment in every complaint, 3) Gullotta never made another payment after his initial default, and 4) U.S. Bank never reinstated the loan. 

 

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You Did What With My Money?!

               On November 26, 2008, LandAmerica Financial Group, Inc. (“LandAmerica”) and its affiliate, LandAmerica 1031 Exchange Services, Inc. (“LES”) filed for Chapter 11 protection from creditors.  LES abruptly ceased its 1031 exchange intermediary business two days prior to the bankruptcy filing and LandAmerica sold its Lawyers Title and Commonwealth Title underwriting subsidiaries to Fidelity Title and Chicago Title shortly after the petition date. 

Monday, April 6, was the deadline for creditors in each case to file their bankruptcy claims.  A review of the filed claims in each case tells quite a tale of woe, with the 1031 exchange customers of LES hit exponentially hard. 

As a 1031 intermediary, LES held proceeds from the sale of its customer’s “relinquished property” for 180 days or until “replacement property” was purchased if earlier.  For an extended period, LES had been investing its customer’s sales proceeds in auction rate securities (“ARS”), the market for which froze in February 2008.  By November, LandAmerica could no longer fund the cash needs for replacement property purchases and this led to the Chapter 11 filing.

Customers who were in the middle of their 180-day replacement period awoke to find that their cash proceeds were not only unavailable (and likely tied up long term in illiquid investments) but that they would not be able to obtain their planned tax deferral under Section 1031 of the Revenue Code.  If that was not injury enough, many of these customers already had replacement properties firmly under contract and suffered the insult of potential breach lawsuits by the sellers of those properties. 

One LES creditor’s claim is reflective of the many similarly situated customers.  Deblu Realty Corporation had almost $1.5 million deposited with LES from the sale of relinquished property, but its proof of claim was not only for that amount but for $373,000 in lost deferral of taxes (at capital gains rates), $3.7 million in potential lost profits on the thwarted acquisition of replacement property as well as yet to be determined amounts for alternate financing costs and legal fees. 

 

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A Guide to Dealing with Increased Delinquencies in Condominium and Homeowners' Associations

According to the Community Associations Institute, nearly 60 million people across the country live in association-governed communities. Many of these communities have been severely affected by the current economic downturn and increase in foreclosure rates. In a condominium or homeowners’ association, delinquencies and foreclosures create a ripple effect that impacts all owners. Once an owner ceases paying assessments, the association must either incur costs to collect the assessments, increase the amount of assessments to other owners, cut back on services, or some combination of the three. The problem is compounded when multiple owners become delinquent. 

The biggest mistake an association board can make is ignoring the problem and hoping that delinquent owners will eventually catch up. An association must have a properly enacted collection policy and adhere to it. For example, the policy may state that an owner whose payment is 30 days late will receive a reminder letter from the board. An owner who is 60 days late will receive a collection letter from the association’s attorney indicating that a lien will be filed if the past due amount is not paid promptly. At 90 days past due, the board should authorize the association’s attorney to file a lien to secure the delinquent assessments. Beyond 90 days, the matter should be reviewed by the board to determine if it is appropriate to file a foreclosure action. 

 

The decision to file a foreclosure action can be a difficult one and must be made on a case-by-case basis. The association’s lien is generally going to be lower in priority than the owner’s first mortgage, and possibly a second or third mortgage as well. This means that unless the property sells at sheriff’s sale for more than the total amount due under the mortgage or mortgages, the association will not receive payment. Additionally, the association will have to bear the costs associated with pursuing a foreclosure action. Nevertheless, it may be worthwhile for the association to file the foreclosure action because it may prompt the owner to pay the delinquent assessments. Even if the owner fails to pay, and the property is ultimately sold at sheriff’s sale without the association receiving any of the sale proceeds, the association may ultimately be much better off having a new owner who will (hopefully) be better about paying assessments. State law and the association’s declaration may permit the association to assess its costs of collection, such as attorneys’ fees and court costs, to the delinquent owner. The association should carefully track these expenses and consult with its attorney to determine if they can be recovered from the delinquent owner.    

Ohio's Foreclosure Prevention Task Force - Mission Accomplished?

 In March 2007, Governor Strickland created the “Ohio Foreclosure Prevention Task Force” to address the ever-increasing number of foreclosures plaguing the state. The group’s final report, issued in September 2007, identified 27 recommendations for state action. Since the rise in foreclosures likely won’t be going away anytime soon, perhaps it’s appropriate to take stock of Ohio’s progress on the recommendations issued over 16 months ago. 

Here are a few of the Task Force’s ideas where notable progress has been made recently:

 

1. Facilitate land banking of properties.

2. Encourage mediation and alternative dispute resolution.

3. Expedite the post-judgment process of property transfer. 

 

The Ohio legislature deserves a fair amount of credit for getting substantial legislation passed quickly on these issues. Most recently, Governor Strickland signed Senate Bill 353 that authorizes Cuyahoga County to create a “county land reutilization corporation” to manage, develop, and maintain vacant property. Much more can be said about the pros and cons of this land-bank effort (and will be in a later post), but suffice to say it is a positive step toward addressing the mass amounts of abandoned properties in the Cleveland area that have resulted from the rise in foreclosures. At a recent presentation to the Cuyahoga County Law Directors Association, County Treasurer Jim Rokakis was very upbeat about being to tackle the “land” aspect of the foreclosure problem.

 

The goals of encouraging mediation and expediting post-judgment transfer were realized earlier through Substitute House Bill 138, signed by Gov. Strickland in September 2008. The bill made sweeping changes to Ohio’s foreclosure process, all aimed at expediting the process and locating parties who purchase properties at sheriff’s sales. It also explicitly authorizes courts to require the mortgagor and mortgagee to engage in mediation at any stage of the foreclosure. 

 

These actions may not be enough to stem the tide of the current crisis, but addressing foreclosure-related issues through legislation now could certainly help minimize similar problems that arise in the future. Now, about those other 24 recommendations…

The CRO Program: Landowner and Lender Responsibility when a Regulated Facility Closes

On January 27, 2009, the front page of the Columbus Dispatch read, “44,000 Jobs Gone.”Other articles report of companies shuttering their facilities or filing bankruptcy. As one affected employee interviewed for the Dispatch article succinctly stated, “It’s scary.” And it’s no less scary for landowners and lenders dealing with properties that have been abandoned.  Landowners whose tenants have abandoned their facilities are trying to recover past rent due and expenses related to cleaning up the equipment, products and chemicals remaining at the facility. Banks are foreclosing on property or are working within the bankruptcy court to recover their money. 

Landowners and first mortgage lenders in these situations should also be aware that they may be subject to environmental clean-up obligations under the Cessation of Regulated Operations (“CRO”) program. CRO was created to protect the public against exposure or pollution from hazardous chemicals left at abandoned facilities. CRO requires the owner or operator of the facility to secure the facility from trespass or vandalism and to comply with 30-day and 90-day deadlines in removing regulated substances and reporting on the progress. If the owner or operator of the facility fails to perform its CRO obligations, then the landowner or first mortgage holder may be responsible to perform certain CRO activities. 

 

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Lender Liability - Minimizing the Risk

A side effect of the foreclosure crisis has been a growing concern among lending institutions over the possibility of “lender liability.” Lender liability encompasses any number of actions that may be asserted by a borrower against a lender based on either the lending process or final loan documents. Borrowers have been seeking new and inventive ways of avoiding foreclosure, often by bringing these claims against banks as counterclaims in a foreclosure action. 

One of the most fruitful areas for lender liability claims to arise is in pre-agreement negotiations. It is easy for a borrower to embellish conversations to claim that an agreement arose, or even that its terms were more favorable than written. A few simple steps can minimize (although not eliminate) the chance a borrower may be successful on such a claim:

1.        Require a written acknowledgement that any pre-execution communications between borrower and lender are not binding. This is particularly important in the loan work-out setting, where a lender does not want to grant concessions under the original loan documents until a final agreement has been reached.

 

2.        One of the recurring themes in lender liability cases is the borrower’s perception that ongoing negotiations have resulted in an agreement. Placing a termination date in all pre-execution documents can avoid this problem.

 

3.        Early in the loan application process, send a letter to the prospective borrower laying out all the required steps to be taken, by both parties, before a loan will be made.

 

Remember, especially in these times, you must “hope for the best and plan for the worst.” As a lender, you are hoping to benefit from a transaction financially, and are eager to get a deal done. But should litigation arise, you want a pile of evidence that all plainly supports your version of the deal. This shouldn’t be a hard sell, as extensive documentation also benefits the borrower by setting out the path to approval and eliminating any misconceptions.