*** PLEASE CAREFULLY READ ***

If you are an owner or officer of any closely-held corporation or limited liability company (or any other business entity or serve as a fiduciary of any entity) – or intend to be, you need to carefully read about these new federal regulations that mandate disclosure of the ultimate beneficial ownership of that entity – the consequence being as much as a $500 per day fine for non-compliance.

For small business owners:

  • We strongly recommend attention to this matter and compliance.
  • If you have a long-dormant LLC or corporation, now may be a time to consider dissolving the same to avoid filing requirements under this regulation.

On January 1, 2024, the Corporate Transparency Act (“CTA”) took effect, requiring non-exempt entities (both foreign and domestic) that are registered to conduct business in the United States to submit certain information regarding their “beneficial ownership” to a confidential database housed within the Financial Crimes Enforcement Network (“FinCEN”).  Unless exempt, the CTA affects:

  • Corporations, LLCs, and other similar entities created by the filing of a document with the Secretary of State, whether formed prior to or after the effective date of January 1, 2024; and
  • Corporations, LLCs, and other entities formed under the laws of a foreign country but registered to do business in any U.S. State, whether formed prior to or after the effective date of January 1, 2024.

These non-exempt entities are referenced in the CTA as “Reporting Company(ies).” The Reporting Companies required to submit information under the CTA are not just limited to corporations and LLCs, but also include limited liability partnerships, limited partnerships, and business trusts.

How do I know if my entity is exempt?

FinCEN recognizes 23 exemptions to the CTA’s BOI reporting requirement.

Please note that these exemptions contain many nuances. If you are unsure whether your entity may qualify for an exemption, we are happy to help you in your evaluation. Additionally, FinCEN’s Compliance Guide (linked below) contains a wealth of information to consider when making this determination.

https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf

We anticipate the most common exemption for our clients will be No. 21 (large operating company).  Large operating companies are those that (a) employ more than 20 full-time employees (30+ hours per week) within the United States, (b) maintain a physical location with an operating presence within the United States, and (c) can demonstrate over $5 million in gross sales or receipts via federal tax return or other applicable IRS form.

What information am I required to disclose?

Reporting Companies are required to complete and submit a form detailing their “beneficial ownership information” or “BOI.” A beneficial owner is any individual who, directly or indirectly, (a) exercises substantial control over the Reporting Company, or (b) owns or controls at least 25% of the ownership interests of the Reporting Company (“Beneficial Owner”). In other words, FinCEN wants to know who owns and controls entities operating within the United States at an individual level.

  • Examples of a beneficial owner who exercises substantial control of a Reporting Company include, without limitation:
  • Officers and directors (or those who exercise the authority of an officer or director), g., CEO, CFO, COO, President, Treasurer, etc.;
  • Individuals with the authority to appoint or remove officers or the board of directors;
  • Individuals with ownership or control of a majority of the voting power or voting rights of the Reporting Company;
  • Individuals with rights relative to the Reporting Company associated with any financing arrangement or interest in a company;
  • Individuals who exercise control over one or more intermediary entities that separately or collectively exercise substantial control over a Reporting Company; and
  • Individuals who direct, determine, or have substantial influence over important decisions made by the Reporting Company.
  • Examples of an ownership interest include, without limitation:
  • Individuals with an interest in the Reporting Company by virtue of equity, stock, or similar instrument; preorganization certificate or subscription; or transferable share of, or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust;
  • Individuals with any capital or profit interest in an entity; and
  • Individuals who have an “option” relative to any of the foregoing.

Minors, individuals acting solely as employees, and those whose only interest in the Reporting Company is via a future right of inheritance are NOT considered beneficial owners.

In determining the percentage of ownership interest in corporations, entities taxed as corporations, and other entities that issue shares of stock, an individual’s percentage of ownership interest is the greater of (a) the total combined voting power of all classes of ownership interests of the individual relative to the total outstanding voting power of all classes of ownership interests entitled to vote, or (b) the total combined value of the ownership interests of the individual relative to the total outstanding value of ownership interests.

For entities that issue capital and profit interests (including entities treated as partnerships for tax purposes—e.g., many one or two-member LLCs), the individual’s total capital and profit interests are compared to the total outstanding capital and profit interests of the Reporting Company.

The person(s) who prepares and/or files the BOI Report is referred to as the “Company Applicant.” This can be an owner or representative of the Reporting Company, such as an attorney. Each Reporting Company will need to provide the name, residential street address, and a copy of a photo ID for each of its Company Applicants AND each of its beneficial owners.

A copy of the BOI Report template can be found here: https://boiefiling.fincen.gov/fileboir.

What is the deadline for submitting the BOI Report?

In short, the deadline for Reporting Companies to submit their BOI Reports differs depending on when the Reporting Company was formed.

  • Reporting Companies formed prior to January 1, 2024 must submit their BOI Reports by January 1, 2025. However, we recommend getting these reports submitted sooner rather than later in case the FinCEN database experiences any technical issues due to increased traffic toward the end of 2024.
  • Reporting Companies formed on or after January 1, 2024 but prior to January 1, 2025 are required to submit their BOI Reports within 90 days of formation (the date on which they receive confirmation from the Secretary of State in most instances).
  • Reporting Companies formed on or after January 1, 2025 are required to submit their BOI Report within 30 days of formation.
  • Any update or change to a Reporting Company’s BOI must be submitted within 30 days of when the change occurs.

What happens if my Reporting Company does not submit its BOI Report within the required timeframe?

FinCEN has provided that:

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held [personally] accountable for that failure.

Furthermore, any individual who refuses to provide information required to be included in the BOI Report, or who provides false information, may also be subject to civil and/or criminal penalties.

Next Steps

If your entity is a Reporting Company created prior to January 1, 2024, you have time. However, you should be compiling the necessary documents and information required to complete the BOI Report. Finney law Firm is offering BOI Consultations, during which time we will (a) help you determine whether your entity is a Reporting Company or whether an exemption applies, (b) hep you identify your company’s beneficial owner(s), and (c) submit your Reporting Company’s BOI Report to FinCEN as a Co-Company Applicant.

If your entity was formed on or after January 1, 2024, your deadline may be quickly approaching, and it is extremely important that you file the BOI Report and/or contact us right away.

Please contact the business law attorney with whom you work at Finney Law Firm or Casey Jones (513) 943.5673 for filing compliance and for more information.

It’s easy to assume that, in order to file a lawsuit, you must necessarily know who you are suing and what you are suing for. This is only partially true.

It is actually not at all uncommon for a party to know that they have been wronged in some manner and know that they have viable legal claims as a result of that wrong, yet not know the identity of the party from whom to seek redress. When this situation arises, there are a couple of options.

Doe Defendants

Civ.R. 15(D) states:

“When the plaintiff does not know the name of a defendant, that defendant may be designated in a pleading or proceeding by any name and description. When the name is discovered, the pleading or proceeding must be amended accordingly. The plaintiff, in such case, must aver in the complaint the fact that he could not discover the name. The summons must contain the words ‘name unknown,’ and a copy thereof must be served personally upon the defendant.”

These unknown defendants will often be identified as “John Doe” or “Jane Doe.”

Petition for Pre-Suit Discovery

On the other hand, Ohio law provides with a process by which they can file a “Petition for Discovery,” which is filed like a complaint but, practically speaking, is more akin to a motion asking the court to order another party to produce certain documents or divulge certain information in response to an interrogatory.

The pre-suit discovery process is governed by R.C. 2317.48, which states:

When a person claiming to have a cause of action or a defense to an action commenced against him, without the discovery of a fact from the adverse party, is unable to file his complaint or answer, he may bring an action for discovery, setting forth in his complaint in the action for discovery the necessity and the grounds for the action, with any interrogatories relating to the subject matter of the discovery that are necessary to procure the discovery sought.

Ohio courts have clarified that “R.C. 2317.48 is available to obtain facts required for pleading, not to obtain evidence for purposes of proof.” Marsalis v. Wilson, 149 Ohio App. 3d 637, 642 (2d Dist. 2002). In other words, this is not a free pass for a party to determine whether he or she has a claim or weigh how strong it may be; it is a limited opportunity to ascertain facts that must be alleged in a proper pleading relative to a claim for which the party already has a good faith basis. In nearly every instance, the missing information being sought is the identity of a potential party.

Civ.R. 34(D) further governs this process with regard to requests for documentation. See generally Huge v. Ford Motor Co., 155 Ohio App. 3d 730 (2004). “R.C. 2317.48 and Civ.R. 34(D) work in tandem to govern discovery actions.” Id., at 734. In order to take advantage of this Rule, the party must first make reasonable efforts to obtain the discovery voluntarily. The petition must include:

(a) A statement of the subject matter of the petitioner’s potential cause of action and the petitioner’s interest in the potential cause of action;

(b) A statement of the efforts made by the petitioner to obtain voluntarily the information from the person from whom the discovery is sought;

(c) A statement or description of the information sought to be discovered with reasonable particularity;

(d) The names and addresses, if known, of any person the petitioner expects will be an adverse party in the potential action;

(e) A request that the court issue an order authorizing the petitioner to obtain the discovery.

Civ.R. 34(D)(1). The court will issue an order for the discovery if it finds:

(a) The discovery is necessary to ascertain the identity of a potential adverse party;

(b) The petitioner is otherwise unable to bring the contemplated action;

(c) The petitioner made reasonable efforts to obtain voluntarily the information from the person from whom the discovery is sought.

Civ.R. 34(D)(3). Note that, under Civ.R. 34(D), that the discovery is needed “to ascertain the identity of a potentially adverse party” is not just a practical effect but, rather, a requirement of the Rule.

Which is best?

If a party can reasonably identify and is merely missing the name of the adverse party or parties or believes they can obtain information from the unnamed parties via discovery once the action is filed, naming a “Doe Defendant” under Civ.R. 15(D) is likely the most efficient route. However, if additional information or documentation is necessary to even begin to identify the adverse party, an action for pre-suit discovery may be warranted.

Statute of Limitations Implications

One common misconception is that an action for pre-suit discovery under R.C. 2317.48 and/or Civ.R. 34(D) or, alternatively, naming a Doe Defendant somehow preserves or tolls the statute of limitations until the party can be identified and the ultimate action (or amended action) brought against them. This is not the case. In 2010, the Supreme Court of Ohio issued its decision in Erwin v. Bryan, holding that it could not, “through a court rule, alter the General Assembly’s policy preferences on matters of substantive law, and Civ.R. 15(D) therefore may not be construed to extend the statute of limitations beyond the time period established by the General Assembly.” 125 Ohio St. 3d 519, 525 (2010). “Civ.R. 15(D) does not authorize a claimant to designate defendants using fictitious names as placeholders in a complaint filed within the statute-of-limitations period and then identify, name, and personally serve those defendants after the limitations period has elapsed.” Id., at 526.

While Erwin does not make as explicit of a finding as to R.C. 2317.48 and/or Civ.R. 34(D), its inclusion of these rules in the same discussion, as well as the nature of such rules (contemplating an action exclusively for discovery and not naming the adverse party or parties, as they cannot be ascertained without the same) strongly suggests an identical result. Indeed, the statute of limitations is intended to encourage parties to be diligent in investigating their claims and, if the identity of an adverse party is in question, the spirit (and, likely, the letter) of the law would require such party to initiate a discovery action with sufficient time to obtain the discovery and then bring the ultimate action.

 

 

Most property owners recognize that the real estate taxes they pay are directly tied to the county auditor’s assessed value of their property. What most do not understand, however, is how those values are determined. In short, auditors in Ohio are tasked with reappraising all real estate in the county ever six years, with “updates” every three years. R.C. 5715.24.

As one might imagine, this is not an easy task, especially in more populous counties. Auditors use a variety of methods and technologies to assist them with appraising and updating the values in their counties. One of the most common and most accurate methods utilized is an examination of recent sales. This does not refer to recent sales in the area (i.e., comparable sales or “comps”)—that is a different method—but, rather, a sale of the actual subject property.

In Ohio, a recent sale of the subject property is “rebuttably presumed to be the true value and represents the best evidence of true value.” Amherst Marketplace Station, LLC v. Lorain Cty. Bd. of Revision, 2021-Ohio-3866, ¶ 10 (emphasis added), citing Terraza 8, L.L.C. v. Franklin Cty. Bd. of Revision, 150 Ohio St.3d 527, 535 (2017). See also R.C. 5713.03. In other words, “[t]he use of a recent arm’s-length sale price is [] the favored means of determining value for purposes of taxation.” Amherst, at ¶ 10. However, this presumption is subject to rebuttal via evidence that the sale was either (a) not at arm’s length or (b) not recent. Id.

What is an “arm’s length” transaction?

For purposes of R.C. 5713.03, an “arm’s length sale” is “a voluntary sale without compulsion or duress, that generally takes place in an open market where the parties act in their own self-interest.” Buck Warehouses, Inc. v. Bd. of Revision, 2d Dist. Montgomery No. 2007-Ohio-2132, ¶ 13, citing Walters v. Knox City Bd. of Revision, 47 Ohio St.3d 23, 25 (1989). Put simply, the inquiry is: What would a willing buyer pay to an unrelated, willing seller for this property on the open market? Of course, the presumption makes sense in this context—obviously, a buyer would pay what a buyer did pay.

What is considered a “recent” sale?

The recency question is a bit more complex. The Ohio Supreme Court appears to say that courts (or taxing authorities) are not “compelled” to presume the recency of a sale that occurs more than 24 months before the tax lien date. See generally Akron City Sch. Dist. Bd. of Educ. v. Summit County Bd. of Revision, 139 Ohio St. 3d 92 (2014). The “tax lien date” is most easily understood as January 1 of the tax year in question. While the Akron case appears to set a “bright-line rule” as to how recent a sale must be in order to be afforded the true value presumption, the Court qualified it by saying that recency should not be presumed relative to a sale that occurred more than 24 months before the tax lien date, “when a different value has been determined for that lien date as part of the six-year reappraisal.” So, if the auditor determines that a value other than the sale price applies, then that sale price (more than 24 months old) cannot be used to create a presumption of the true value of the property.

Regardless of whether a prior sale is sufficiently recent to trigger a presumption as to the value of the property, even older sales are important to the determination of the true value. The Ohio Supreme Court has held that, even where sales are too remote to be afforded a presumption of value, they are “some indication of true value” and “should [be] taken into account.” Dublin-Sawmill Properties v. Franklin County Bd. of Revision, 67 Ohio St. 3d 575, 576-77 (1993) (emphasis added). Similarly, the First District Court of Appeals has held that taxing authorities act appropriately in “considering evidence of [a] sale . . . in making [their] determination of value” even where the sale was not sufficiently recent to create a presumption of value. Othman v. Bd. of Educ., 1st Dist. Hamilton Nos. C-160878, C-170187, 2017-Ohio-9115, ¶ 22.

What does all of this mean for property owners?

Practically speaking, this body of law affects the average property owner in two ways: (1) preparing for a potential increase in property taxes relative to recently purchased property, and (2) knowing the available options relative to tax appeals.

The first scenario is perhaps most common in the current, booming real estate market. Consider the following:

You purchased a home in May 2019 for a purchase price of $350,000.00. The county auditor’s assessed value of the home was $180,000.00 as of the date you purchased. In 2020, the auditor increases your value to $350,000.00.

(Side Note: Many homeowners are pleased when the auditor increases the value of their home because they think it corroborates the investment they made and demonstrates that they now own a more valuable piece of property. While this makes sense, it is also important to consider that this value is what sets the amount of property taxes for which the owner will be responsible. In short, the higher the value, the higher the taxes.)

In the above example, your property taxes will nearly double if the auditor catches the sale and adjusts the value to the sales price. This is not inherently unfair. Notwithstanding the rising sale prices, that is what you paid for the property so you must have thought it was worth that. But it is important that buyers are aware of this near inevitability, go into the transaction with eyes open, and have the means to properly deal with its implications.

The second scenario will likely be less common with the recent passing of HB 126 (significantly restricting school districts’ ability to file tax complaints seeking an increase in the value and, thus, taxes paid by property owners in their districts).

Your property is and has been valued between $430,000.00 and $450,000.00 from 2008-2018. You bought the property on the open market for $515,000.00 in 2018. In 2019, you receive a notice in the mail that the value is being increased to $515,000.00 (to match the sale price). Three years later (in 2022), you receive a similar notice increasing the value to $800,000.00. You haven’t made any material improvements to the property. What are your options?

Here, this is an arm’s length transaction. However, you purchased the property nearly three years prior to the “tax lien date” (Remember: 2022 tax bills relate to Tax Year 2021, so the “tax lien date” is 1/1/2021). Under the precedent set in the Akron case, you aren’t entitled to a presumption of value based on the sales price. However, the sale price is some evidence of value that any reviewing authority should take into account. These considerations are important in deciding whether to file a Complaint with the Board of Revision to challenge your value.

Our firm’s experienced attorneys represent real estate investors, property owners, and tax payers relative to these issues and can help you navigate the best option(s) for your individual circumstance, including advising as to whether and when you should challenge your property values and formulating a strategy to give you the best possible chance of success. We’d love to work with you.

Pursuant to R.C. 5713.20(A), “[i]f the county auditor discovers that any building, structure, or tract of land or any lot or part of either, has been omitted from the list of real property, the auditor shall add it to the list[.]” This “omitted property” includes property that was incorrectly, though in earnest, subjected to an exemption. However, it does not stop there.

The auditor is also required to compute and assess the taxes for preceding years during which the property was incorrectly omitted or exempted, up to five years, unless the property was transferred in the meantime. For purposes of this provision, “in the meantime” means before the omitted tax is actually assessed. If the property was transferred, the assessment can only relate to the time period after the transfer – i.e., the new owner will not be responsible for omitted taxes that would have accrued prior to its ownership. This should encourage a new or prospective owner to evaluate whether and how the property is taxed, make sure any exemptions, indeed, apply or that such use will continue, and otherwise prepare themselves for the likelihood of an increased tax.

As for property taxes accrued prior to a transfer of ownership, these are typically prorated at the closing (as for arm’s length transactions for value). But what happens if there is no closing?

Consider the following scenario:

Father owns property that has, for years, been subject to a property tax exemption. Father is ill and wants to avoid probate upon his death, so he executes a Transfer on Death (“TOD”) Affidavit, which will allow the property to transfer to Daughter without the need to open an estate. Upon Father’s Death, the property transfers to Daughter. However, unbeknownst to Daughter (and, perhaps, even unbeknownst to Father), an “omitted tax” was assessed two weeks before Father’s death and, thus, prior to the point in time that the property actually transferred to her.

The omitted tax was assessed because the auditor found that the property was improperly exempted or the exemption no longer applied for tax years preceding Father’s death. Because the omitted tax was assessed prior to the actual transfer of the property (remember, it did not transfer until the time of Father’s death), the “unless in the meantime the property has changed ownership” exception to R.C. 5713.20 does not apply. However, property tax assessments “run with the property,” meaning that Daughter is now responsible for, essentially, paying back up to five years’ worth of tax savings that Father realized as the result of the improper exemption (through no fault of his own), even though Daughter had no vested interest in the property during the period for which the exemption was in effect. If Daughter does not pay the omitted tax, she risks tax liens and/or foreclosure of the property. These omitted taxes can pretty quickly add up to tens of thousands of dollars, even before non-payment penalties.

In the case of an omitted tax, timing is of the utmost importance – e.g., when the omitted tax was assessed relative to when the property changed ownership. This may seem like a one-off case or unlikely occurrence. However, TOD affidavits are becoming an increasingly popular method of avoiding probate and, often, the TOD beneficiaries take little interest in the property until such time as it is to transfer to them. The lesson: be vigilant. The county auditors’ websites publish information relating to tax assessments and payments. The knowledge of whether a property in which you may, at some future time, have an interest is literally a few mouse clicks away. And if you need help, we have attorneys who are familiar with these issues relative to each of the tax, real estate, and probate implications who can assist you.

Properly drafted written contracts are typically enforceable as against the parties thereto, with few exceptions – fraud being one of them. The manner in which written contracts are treated upon the allegation of fraud is highly dependent on the type of fraud alleged. In short, it is a question of whether the party claiming fraud alleges that they were defrauded as to the terms or nature of the contract or as to the facts and representations underlying the contract.

Void and Voidability

One of the most common scenarios in which this question arises is relative to settlement agreements and/or “releases,” where one party gives some consideration (e.g., money) in exchange for the settlement and release of actual or potential legal claims. The type of fraud being alleged determines whether the contract or agreement is automatically void (void ab initio) or merely voidable. “A release obtained by fraud in the factum is void ab initio, while a release obtained by fraud in the inducement is merely voidable upon proof of fraud.” Haller v. Borror Corp., 50 Ohio St. 3d 10, 13 (1990). “Whether a release was procured through fraud of either type is a question for the trier of fact [such as a jury]. Whether the fraud as alleged is in the factum or in the inducement is an issue of law for the court.” Id., at 14-15.

Fraud in the Factum

“A release is obtained by fraud in the factum where an intentional act or misrepresentation of one party precludes a meeting of the minds concerning the nature or character of the purported agreement.” Id. Imagine a grandchild telling her grandmother that she is signing a letter for school when it is really a change to her estate plan. “Where device, trick, or want of capacity produces ‘no knowledge on the part of the releasor of the nature of the instrument, or no intention on his part to sign a release or such a release as the one executed,’ there has been no meeting of the minds.” Id., quoting Picklesimer v. Baltimore & O. R. Co., 151 Ohio St. 1, 5 (1949).

Fraud in the Inducement

As the title would suggest, “[c]ases of fraud in the inducement. . . are those in which the plaintiff, while admitting that he released his claim for damages and received a consideration therefor, asserts that he was induced to do so by the defendant’s fraud or misrepresentation.” Haller, at 14. In Haller, the alleged fraud involved the financial solvency of a defendant company. In essence, a representative of the company allegedly represented to the plaintiffs that the company would soon be closed and, therefore, if Plaintiffs did not accept the offered settlement, they would likely receive nothing with respect to their claim(s). Id., at 11-12. The plaintiffs apparently later learned that this was not true. The Ohio Supreme Court found these allegations consistent with a claim of fraud in the inducement.

Practical Considerations

“A release of liability procured through fraud in the inducement is voidable only, and can be contested only after a return or tender of consideration.” Haller v. Borror Corp., 50 Ohio St. 3d 10, 14 (1990); see also Berry v. Javitch, Block & Rathbone, L.L.P., 127 Ohio St. 3d 480, 483 (2010) (“[A]n action for fraud in the inducement of a settlement of a tort claim is prohibited unless the plaintiff tenders back the consideration received and rescinds the release.”); Manhattan Life Ins. Co. v. Burke, 69 Ohio St. 294 (1903).

While it may seem obvious, one cannot seek to void a contract while retaining the consideration they received for the same. In Haller, the plaintiffs received $50,000 in exchange for a release of their prior claims. The Court, finding their allegations of fraud to be consistent with fraud in the inducement, held that the plaintiffs were required to tender back the $50,000 to the defendants before they could seek to void the settlement agreement and release. Because they had not done so, the release they signed remained valid and enforceable, and their claims (including those released under the settlement agreement and that of fraud in the inducement) were dismissed. This is consistent with the idea that one cannot “cherry-pick” which parts of a contract to enforce; they cannot denounce their obligations under a contract while retaining the benefits thereof.

When it comes to contract negotiations, these cases demonstrate how important it is to (a) start from a properly drafted contract, and (b) do your due diligence in order to mitigate the risk of later disputes and litigation. Our transactional team is uniquely positioned to help in these negotiations, having significant experience in contract drafting, negotiation, and disputes.

For assistance with contractual matters, contact Casey Jones (513.943.5673 )

Earnest Money vs. Liquidated Damages

As Chris Finney has addressed extensively in prior blog entries, “a common misunderstanding of parties to a purchase contract is that the escrow money is some sort of measure of or limitation on damages for the buyer’s breach, or, conversely, that the return of the earnest money ‘cures’ the seller’s breach and is the limitation on his damages as well. However, unless the real estate purchase contract specifically calls out either of those limitations, neither of those propositions is true.” In other words, an earnest money deposit is in no way representative of the amount of “damages” caused by a breach of the contract unless the parties to that contract say it is.

Consider the following example: A Buyer contracts to purchase a home for a purchase price of $350,000. Buyer deposits $5,000 in earnest money. Buyer decides to buy a different home instead and breaches the contract to purchase the first home. The Seller of the first home has a tough time selling it after Buyer backs out but, eventually, finds someone else to buy the home. However, the new buyer will only pay $320,000. Seller can typically seek damages from Buyer based on the difference in the purchase price, i.e., $30,000, because that is the amount that places Seller in the position he would have been but for Buyer’s breach. Seller is NOT limited to merely collecting the $5,000 earnest money.

So then what does the phrase “unless the parties to the contract say it is” really mean? How can the parties to a contract predetermine what the damages will be if one of them breaches?

A liquidated damages clause is a contractual vehicle through which the parties can stipulate – in advance – the amount of damages due and owing should one of them breach the contract. It can be a fixed amount or a percentage of the total contract price. Relative to real estate contracts, particularly in the commercial context, parties will sometimes agree, in the purchase contract, that the earnest money will act as liquidated damages in the event of breach. Thus, while liquidated damages are not necessarily equal to the amount of earnest money deposited, they can be if the parties so agree.

Are liquidated damages clauses enforceable?

As the Ohio Supreme Court has long held, “parties are free to enter into contracts that contain provisions which apportion damages in the event of default.Lake Ridge Academy v. Carney, 66 Ohio St. 3d 376, 381 (1993). However, many parties who later breach a contract after having agreed to such a provision unsurprisingly attempt to defeat the same by arguing that the provision to which they agreed is somehow unenforceable – most often, by arguing that the clause operates a “penalty.”

Ohio courts utilize a three-part test to evaluate whether a liquidated damages clause is, indeed, enforceable.

Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.

Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St. 3d 27, Paragraph 2 of the Syllabus (1984).

Courts routinely uphold these clauses in the real estate context, in large part due to the unpredictability of the market. See, e.g., Cochran v. Schwartz, 120 Ohio App. 3d 59, 62 (2d Dist. 1997); Kurtz v. Western Prop., L.L.C., 2011-Ohio-6726 (10th Dist. 2011); Ottenstein v. Western Reserve Academy, 54 Ohio App. 2d 1, 4 (9th Dist. 1977); Schottenstein v. Devoe, 83 Ohio App. 193, 198 (1st Dist. 1948); Curtin v. Ogborn, 75 Ill. App. 3d 549, 555 (Ill. App. 1979) (outlining a general rule that liquidated damages are appropriate in amount where ten percent or less of the purchase price). This is because “although the contract price is easily ascertainable, the fair market value of real estate fluctuates, in some cases dramatically, and these fluctuations, based upon numerous independent variables, are unpredictable.” Kurtz, at ¶ 30 (relative to the first prong in the Samson test). “Difficulties inherent in assessing the fair market value of property due to the volatility of the real estate market have been the impetus for Ohio courts giving effect to liquidated damages provisions in real estate transactions.” Id., at ¶ 31.

Who does a “liquidated damages” clause benefit?

While it is perhaps easier to envision how liquidated damages provisions tend to benefit the non-breaching party, they can be just as advantageous to a breaching party. For example, consider a situation where Buyer is under contract to purchase a $1 million retail center with a $100,000 liquidated damages clause. Buyer elects not to purchase the property and breaches the contract. A week after Buyer’s breach, there is a down-turn in the real estate market and, now, Seller can only get $800,000 for the property. Rather than potentially being on the hook for the $200,000 difference between the contract price and ultimate sale price, Buyer’s liability is capped at the fixed liquidated damages amount of $100,000 because that is what the parties agreed to in the contract.

Liquated damages clauses can also be mutually advantageous inasmuch as it allows the parties to know what to expect. Circumstances may arise that require a party to choose between breaching the contract or incurring some other loss. In such a situation, the clause helps that party weigh their options and explore all possible outcomes in order to make an informed decision.

Is a liquidated damages clause a good idea?

Like so many legal questions, the answer is unfortunately the rather frustrating “it depends.” Ultimately, whether to include a liquidated damages clause in your contract or whether to agree to such a clause being proposed by the other side, is a decision that should be made on a case-by-case basis after considering all of the potential factors that may come into play.

Our firm has significant experience in dealing with these types of provisions – from drafting, to review, and to enforcement – and we can help you explore how including such a provision in your real estate contract may impact you, as well as answer any other real estate contract questions you may have.

While the real estate market seems to have slowed slightly, our title company, Ivy Pointe Title, continues to close a record-breaking number of transactions. Perhaps due to challenges that buyers are facing in making competitive offers and having those offers accepted, our firm has also noticed an uptick in the number of (actual or attempted) contract terminations prior to closing – this phenomenon, when unjustified under the terms of the contract, is often referred to as an “anticipatory repudiation.”

An anticipatory repudiation is “‘a repudiation of the promisor’s contractual duty before the time fixed for performance has arrived.’” Sunesis Trucking Co. v. Thistledown Racetrack, L.L.C., 2014-Ohio-3333, ¶ 29 (8th Dist. 2014), quoting McDonald v. Bedford Datsun, 59 Ohio App.3d 38, 40, 570 N.E.2d 299 (8th Dist.1989). For example, if you have a contract to sell your property to a buyer, and the buyer backs out three days before the closing for any reason not justified under the terms of the contract – or for no reason at all – an anticipatory repudiation of the contract has likely occurred. It is akin to a breach of the contract; however, because it occurs before “the time fixed for performance” (i.e., the closing), it is considered “anticipatory.”

Remedies

“If an anticipatory breach of contract is found to occur, the injured party has the option of (1) terminating the contract and suing the breaching party immediately, or (2) continuing the contract and suing the breaching party for damages after the time for performance has passed.” Sunesis, at ¶ 33, citing 18 Ohio Jurisprudence 3d Contracts, Section 238 (2011). It is worth noting that the “repudiation” must be unequivocal. If you are unsure whether a party’s statement amounts to a repudiation or whether they intend to still fulfill their obligations under the contract, you should seek “adequate assurances” as to whether they intend to comply.

An anticipatory repudiation may stem from a buyer submitting offers on multiple listings to increase the odds of one of their offers being accepted (certainly plausible in this market) or a seller receiving a higher back-up offer and having remorse over having accepted a previous, lower offer. In either event, the non-repudiating party has a right to enforce the contract or sue for their damages. For instance, in the above hypothetical, the seller could re-list the property and, if the property sells for lower than the contract price with the original buyer, sue for the difference.

Affidavit of Title

An additional mechanism that is often helpful for a buyer (where the seller repudiates) is an affidavit of title. Pursuant to Ohio R.C. 5301.252, a person having an interest in real estate by virtue of a contract may assert his or her interests via an affidavit recorded in the real property records. This effectively encumbers the real estate such that most title companies will not close a transaction on the property while the affidavit is pending. In other words, it prevents the seller from being able to sell the property to someone else where you have a valid and enforceable contract to purchase that same property – it forces them to “deal with” you and your contractual interest in the property. Importantly, the affidavit of title has various technical requirements and, if containing any untrue statements, could serve as the basis for a slander of title claim. Therefore, it is important to consult with an experienced attorney before utilizing this mechanism to make sure that it is properly prepared and recorded.

If you would like to know more about your rights relative to a real estate contract, please don’t hesitate to contact us. We would be happy to meet with you and explore your options.

 

The Basics

As a basic principle, every citizen in the United States (and even non-citizens) are entitled to due process under the law. In simpler terms, everyone has the right to have their legal disputes treated fairly based on established laws and principles. With certain exceptions, this includes a right to bring an action in court to hold accountable those who have committed a wrong.

So what are those exceptions, and what do they mean?

One of the most notable exceptions to the right of a person to have their matter heard in court is where the parties have agreed to a process known as “arbitration.” Arbitration is “a method of dispute resolution involving one or more neutral third parties who are [usually] agreed to by the disputing parties and whose decision is binding.”  Black’s Law Dictionary 119 (9th ed. 2009). Practically speaking, arbitrators are usually practicing or retired attorneys and/or judges who essentially serve as the trier of fact in an expedited proceeding held in lieu of a court trial. Arbitration can be particularly appealing to large companies that often face high volumes of threatened or actual legal claims for a multitude of reasons – for one, arbitration is generally more expedient and cost effective than in-court litigation. Employers frequently require them as a condition of employment so that various employment claims are handled confidentially.

Why wouldn’t everyone want to participate in arbitration?

Another reason that large companies, such as banks, credit card companies, and other financial institutions, may push arbitration is that it is a significantly more favorable forum for – you guessed it – those companies. Other significant disadvantages for the “Average Joe” consumer in arbitration are: (a) these arbitration clauses often disallow class actions or certain elements of damages, i.e., “punitive” damages, (b) arbitration usually limits the parties’ discovery rights – for example, the consumer may not be able to depose witnesses or seek the production of documents that could help them prove their claims and (c) arbitration is frequently required to be confidential, prohibiting a public discussion of the facts and outcome of the proceeding.

What if I don’t want to be forced into arbitration?

Over the past several decades, the law has been very favorable to companies seeking to force customers/consumers into arbitration. Southland Corp. v. Keating, 465 U.S. 1, 11 (1984) (noting “a national policy favoring arbitration”). However, there has recently been a palpable shift in these principles, especially in Ohio and the Sixth Circuit.

Arbitration Case Law

In March 2021, the Sixth Circuit overturned an Eastern District of Tennessee case wherein the District Court granted a bank’s motion to dismiss litigation filed in court and compel arbitration. See generally, Sevier County Schs. Fed. Credit Union v. Branch Banking & Trust Co., 990 F.3d 470 (6th Cir. 2021). In that case, the bank (after a series of mergers) sent out a new agreement that contained new or updated terms and stated that, by continuing to maintain an account with the bank, the accountholders agreed to those new terms – in other words, continuing to do business with the bank constituted acceptance of the new terms. The new terms included, inter alia, a binding arbitration provision and a waiver of class actions. Id., at 473. The District Court found that, by continuing to do business with the bank, the plaintiffs had accepted such terms and, therefore, must pursue their claims via arbitration. See generally, id. But the Sixth Circuit disagreed. Id.

In rendering its decision, the Sixth Circuit found that determining the existence of a valid arbitration agreement is a question of state-law contract principles. Id., at 475. That is, what are the elements required to create a contract under state law, and were those elements met. Under Tennessee contract law (which is analogous to Ohio contract law), the formation of a contract requires consideration and mutual assent. Id., at 476. Mutual assent can only be found where there is a “meeting of the minds,” meaning “Did both sides assent to be bound by the terms of the contract?” Id. The Sixth Circuit in Sevier County found no mutual assent and, specifically, noted that mere “silence or inaction” is insufficient to bind a party to an arbitration provision. See id., at 477, quoting its prior decision in Lee v. Red Lobster Inns of America, Inc., 92 F. App’x 158, 162 (6th Cir. 2004) (“The flaw in the district court’s analysis is that it places the burden on the [consumers] to . . . object to a company’s unilaterally adopted arbitration policy or risk being found to have agreed to it. This is not how contracts are formed.”).

Ohio courts have begun following suit, even citing directly to Sevier County. On August 5, 2021, the Eighth District Court of Appeals rendered its decision in Gibbs v. Firefighters Community Credit Union, 2021-Ohio-2679, affirming the lower court’s decision denying a defendant’s motion to stay the action pending arbitration. In Gibbs, plaintiffs filed a class action lawsuit, and the defendant credit union moved to compel arbitration, arguing that plaintiffs agreed to a change in the terms and conditions of their account agreements, including an “Arbitration and Waiver of Class Action Relief provision,” by failing to opt out. Id. at ¶¶ 2-3. The credit union purportedly sent notice of these changes to account holders via email, and the email stated that an account holder’s continued use of defendant’s banking services indicated assent to the updated terms. Id. at ¶¶ 3-4. The credit union maintained that because plaintiffs never opted out of the provision, it became effective and controlled the matter. Id. at ¶ 3. However, nothing in the content of the email informed the account holders of the Arbitration and Waiver of Class Action Relief provision or the ability to opt out – this information was, instead, included in an attachment to the email.  Id. at ¶ 5.

Like the court in Sevier County, the Eighth District in Gibbs relied on Ohio contract law principles governing the formation of contracts and found that the credit union failed to meet its burden of establishing the existence of an agreement to arbitrate. Id. at ¶¶ 14, 18. The court held that there was no “meeting of the minds” between plaintiff and the credit union as to the arbitration provision because the content of the email notice gave no indication that the changes involved the addition of the arbitration provision. Id. at ¶¶ 16-17. Instead, “[t]he Plaintiffs were thus lulled into not giving a thought to the unilateral addition of the arbitration provision . . .” Id. at ¶ 17, quoting Sevier County, 990 F.3d at 481.

Take Action

If you wish to pursue claims that the other party maintains are subject to an arbitration provision, and you do not wish to participate in arbitration, you may have some options. For instance, if you dispute the existence or validity of an arbitration clause, Ohio statute provides a process by which you can assert such dispute. See R.C. 2711.03(B) (“If the making of the arbitration agreement or the failure to perform it is in issue in a petition filed under division (A) of this section, the court shall proceed summarily to the trial of that issue.”). That is, if you dispute that an arbitration agreement exists, you may be entitled to have a court determine that threshold issue before the underlying claims proceeds.

We Want to Help

We recently had a case where a financial institution argued that our client’s claims, filed in state court, were subject to an arbitration agreement and, therefore, moved the court to dismiss our claims and compel arbitration. We disputed that our client had ever received proper notice of any arbitration agreement, much less agreed to the same, under facts very similar to the Sevier County and Gibbs cases discussed above (ironically, the financial institution had previously cited to the District Court case in Sevier County, yet failed to notify the Court when it was overturned by the Sixth Circuit). We moved for a trial under R.C. 2711.03(B), which was granted. After an unsuccessful interlocutory appeal by the financial institution and nearly eighteen months of litigation and discovery on this limited arbitration issue, the financial institution eventually agreed to withdraw its motion to compel arbitration.

While it is not always an easy road, we are passionate about protecting our clients’ rights, including the right to have their claims heard in the proper forum. Unfortunately, consumers are too often “railroaded” by big companies with deep pockets in the litigation process, and it is our desire to make sure every client has access to the tools necessary to hold these companies accountable for their conduct. As is evident from our recent case and the long and arduous battle it took to keep our client’s claims in state court where they belong, we don’t say this lightly – we live it every day in our practice.

If you are considering bringing a claim or have concerns regarding whether an arbitration agreement may apply, we can help you evaluate those questions and explore your options.

Please contact Casey Jones (513.943.5673) if we can help with your litigation or arbitration dispute.

There is a significant new development in Ohio property tax challenges directly and narrowly resulting from valuation reduction arising from the COVID-19 pandemic allowing such challenges this year.

As we discussed in a blog entry here, because of the unique timing of real property valuations versus billing, Ohio property owners impacted by COVID-19 rent reductions and closures really could not bring successful COVID-related valuation challenges before Boards of Revision in 2021.

To exacerbate that problem, Hamilton, Clermont, Butler and Montgomery Counties had the first year of the tax triennial in 2020 (for challenges in 2021). Therefore, if a property owner attempted a COVID valuation challenge in 2021 and lost, a property owner would be stuck with a bad (high) valuation for three years (tax years 2020, 2021 and 2022, billed and payable in 2021, 2022 and 2023).

This placed owners of certain properties in significant financial straits: Owners of apartment buildings near a university where student-based occupancy plunged or downtown when nearby office buildings cleared out, owners of large office buildings that could not rent because of COVID-related vacancies, owners of hotels and motels and other properties in the travel and hospitality industry, owners of restaurant properties and owners of malls and retail strip centers.

That all changed two weeks ago when Governor DeWine signed into law S.B. 57 which adds a second challenge period in 2021 narrowly targeted to COVID-related property valuation reduction (i.e., not that of general market conditions).

Here is the quick overview:

  • “Second bite” challenges may be filed with the Auditor only between July 26 and August 25, 2021.
  • “Second bite” challenges must narrowly be tailored to valuation reduction as a result of COVID-19.
  • The target valuation date for “second bite” valuations is October 1, 2020.
  • The “second bite” valuation reduction is retroactive to January 1, 2020 (before the pandemic hit America).
  • The “second bite” valuation reduction will last for the remainder of the triennial (in Hamilton, Clermont, Butler, and Montgomery Counties thru the 2022 tax year, billed and paid in 2023).
  • The bringing, and “win” or “loss,” of a valuation challenge for the “second bite” hearings is in addition to the general challenge filed before March 31, 2021 and does not prejudice non-COVID-related (i.e. general market conditions) challenges in later years.
  • The legal and evidentiary hurdles associated with “second bite” challenges are the same, as we see it, to challenges brought in Ohio, meaning an appraisal (supported by testimony from the appraiser) and presentation by a qualified attorney are strongly recommended.

If you have a “second bite” property that would benefit from a challenge narrowly targeted to COVID-19 economic impact, please quickly contact Chris Finney (513) 943-6655) or Casey Jones (513-943-5673) to allow us to help you secure this tax savings.

Attorney Casey Jones

Despite laws requiring drivers to carry insurance, we have unfortunately seen a number of cases recently involving accidents caused by uninsured or underinsured motorists. Luckily, most car insurance policies can provide some relief in these circumstances.

When does a UIM claim come into play?

An uninsured driver scenario is fairly self-explanatory – the driver who causes the accident doesn’t have insurance and, thus, collecting on a claim against him or her may prove difficult, so you have to go through your own auto insurance policy for compensation. An example of an underinsured driver, on the other hand, may be a situation where you are in an accident caused by another driver, and your medical bills and lost wages total around $40,000.00; however, the at-fault driver only has policy limits of $10,000.00. Your own auto insurance policy may kick in to cover the difference, as well as additional damages for pain and suffering. Of note, many underinsured motorist policies have specific conditions – for example, coverage may only “kick in” if the at-fault driver’s coverage is below a certain threshold, regardless of whether that threshold adequately compensates the victim.

“My insurance company is not offering me as much as I think the claim is worth. . .”

Many people operate under the reasonable but, unfortunately, mistaken belief that because it is their own insurance company that is responsible for paying a UIM claim, they should have an easier time receiving fair compensation.

“But we pay them ‘good money’ each month in premiums, and they work for us. Shouldn’t they be willing to pay more to make us whole?”

Many are surprised to learn that really isn’t the case.

We often hear complaints that the insurance company is offering an insultingly low settlement figure. It is not uncommon for our clients to have already received an offer before they reach out to us, and they do so because aren’t satisfied with the initial offer.

We can help make sure you submit an appropriate demand amount, provide all of the supporting documentation for your insurance company to make a reasonable and informed settlement offer, and frame your claim in a way that makes sense for the assigned adjuster, all in order to maximize your recovery.

. . . And if they still don’t offer a reasonable settlement figure?

Insurance companies are bound by a duty of good faith in investigating and evaluating first-party claims like UIM claims. If your insurance company unreasonably denies your claim, refuses to make a timely investigation and offer (i.e., drags their feet), or offers you an unreasonably low figure relative to your damages after exhausting all negotiations, you may have an additional claim for bad faith. If successful in bringing that claim, you may also be entitled to punitive damages, court costs, and/or attorneys’ fees, in addition to your recovery on the underlying accident claim.

We are here to help…

I often hear of car accident victims being afraid to involve an attorney for fear that their legal fees may “eat into” any settlement they may receive. While this is certainly a valid concern, working with counsel frequently has the opposite effect, ultimately. This is because we can often increase the “net” to you by framing your claim in a way that maximizes recovery and, possibly, getting your subrogation liens reduced where appropriate. We make it a priority to never take a case unless we believe we can “create value” for the client. Please feel free to reach out to me at (513) 943-5673 or [email protected] if you’d like to set up a free consultation. I am also offering remote consultations to during this time to honor COVID-19 health concerns.