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 )

We all know of creative and incessant attempts to defraud us of our hard-earned money, many (but not all) internet- and email-based.  But nonetheless (i) the efforts of snooker us never stop, and (ii) we must constantly tell others in our family and our organization to be wary.  Eternal vigilance is a business and personal requisite these days.  The criminals are absolutely relentless.

Just this last week, our firm and my family were “almost” taken in by two of these international criminals:

  • Our firm (because we have a great web site and use internet marketing tools) constantly gets “new client inquiries” (usually via our web portal or regular email) from fraudsters asking us “do you review contracts?” or “can you sue someone for us?,” pretty generic and bland (but transparently fraudulent) inquiries.  I generally just “delete,” but one of these made it to one of our newer associates.  It was a client from Dubai who wanted us to assert certain contractual claims against another party.  We did so, and the matter instantly settled with a $385,000 certified check payable to our firm escrow account.  The fraudulent client then wanted us to wire the escrowed monies to him and a third party, both overseas (major red flag there!).  Fortunately, our crack bookkeeping staff saw the certified check was dishonored before we wired out the funds — disaster averted!.  But it was a close call.

[Something to note about these fraudulent inquiries: (i) they never want to communicate via telephone (but rather by email), (ii) the phone number they provide is always bad, and (iii) they always have some bland *@Gmail address.”  I sometimes respond to the email address they provide “please call me,” and they never do.  I call the phone number and it is bad for one reason or another.]

  • Sunday, right before the Superbowl, I stopped to have lunch with my wife.  She related to me that a piece of furniture she had for sale in Facebook Marketplace had sold to a buyer in California.  He was going to send us “certified funds” and then wanted us to pay his moving company to bring the piece to California.  “Wait a minute,” I said.  “why would we pay his mover,” and it vaguely reminded me of a fraud scheme I had heard from a client or read about on the internet.  Sure enough, I Googled “pay the mover” and found out this is a common scam.  You wire or pay funds to a mover, and later the “certified funds” are dishonored.  The victim is “out” the moving fee and the scammer never intended to pay for your furniture!  My wife told the would-be buyer that we would hold the “certified funds” for 10 days before shipping the goods, and he went radio silent immediately.  Fraudster!

Our firms, and our title company in particular, are attacked by fraudsters almost daily.  Fortunately, we are alert to the most common scams, and have avoided them all (we have clients who have not been so lucky).  But these two close calls — at the office and at home – remind us that vigilance is required and gullibility, and trust, in the internet era are simply foolish!

Be cautious with your funds and your property.  There are loads of fraudsters — some anonymous on the internet and some that you think are your friends — who will gladly and shamelessly steal your money and leave you wondering why you fell for their scam!

Be cautious!  Be aware!  Trust very few.

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.

10,000 Foot View of What You Need to Know

On February 11, 2022, Ohio’s law governing limited liability companies will change from its current form under Ohio Revised Code Chapter (“ORC”) 1705 (the “Old Law”) to its new form under ORC Chapter 1706 (the “New Law”). This means some significant changes for Ohio limited liability companies, which also apply to those organized under the Old Law. To make these changes less painful and reduce confusion, the New Law will use many of the same terms used in the Old Law. This blog is meant to provide an overview of some, but certainly not all, of those changes.

Changes Relevant to Operating Agreements

An operating agreement is a document governing the relations among the members of a limited liability company and the limited liability company. Many of the provisions of the New Law are default provisions, which a limited liability company can alter through its operating agreement. Due to the default nature of the provisions of the New Law, operating agreements existing under the Old Law should not be affected by the New Law.

Provisions That May Not Be Altered

Similar to the Old Law, a limited liability company may not alter certain provisions. For example, a limited liability company may not (i) eliminate the implied covenant of good faith and fair dealing, as discussed below; (ii) enforce promises to make capital contributions, which are not in writing; or (iii) create a situation where a limited liability company is not a separate legal entity. This is not an exhaustive list.

Limitation, Expansion, and Elimination of Fiduciary Duties

A limited liability company may alter certain duties and liabilities through an operating agreement. An example under the New Law is that a limited liability company may limit, expand, or eliminate fiduciary duties (defined by Black’s Law Dictionary as “a duty to act for someone else’s benefit, while subordinating one’s personal interests to that of the other person”) owed by members, managers, and others. However, this ability for a limited liability company to alter fiduciary duties is not absolute, as a limited liability company may not use an operating agreement to do away with what is referred to as the implied covenant of good faith and fair dealing. The Old Law did not allow for the elimination of fiduciary duties but did allow for the limitation, expansion, and elimination of the duties of loyalty and care. 

            Penalties For Failure to Comply with an Operating Agreement

Under the New Law, a limited liability company may, also through its operating agreement, impose any penalty or consequence upon a member for failing to comply with its operating agreement. A couple of specific examples enumerated in the New Law include (i) forcing the sale of a member’s membership interest in a limited liability company and (ii) reducing a member’s proportionate interest in a limited liability company. The Old Law did not allow for such penalties.

            Third Parties’ Ability to Approve Amendments

Another wrinkle from the New Law dealing with operating agreements is that a limited liability company may vest the authority to approve amendments to its operating agreement in third parties (parties not involved in the limited liability company). The Old Law did not allow for this.

Separate Asset Series

One of the more critical changes in the New Law, which was not allowed under the Old Law, is the allowance for separate asset series in limited liability companies. Through its operating agreement, a limited liability company may establish separate series with separate (i) rights, powers, or duties regarding specified property or obligations of the limited liability company or its profits and losses; or (ii) purposes or investment objectives. Either of the foregoing is possible if each series has at least one member associated with it.

Where there is a separate asset series, the debts, liabilities, obligations, and expenses for that series are only applicable to that series, not any other series or the limited liability company in general, and vice versa.

To benefit from this treatment, a limited liability company must (i) maintain the assets of each series separately from any other series, and the limited liability company in general; and (ii) provide a statement in its operating agreement and its articles of organization (document filed with the Ohio Secretary of State to establish the limited liability company) similar to what is outlined in the preceding paragraph.

Membership Without Membership Interest or Contribution

Under the New Law, a party may become a member of a limited liability company without acquiring a membership interest or contributing to a limited liability company.

The Old Law required that a party be admitted (i) at the time a limited liability company was formed, (ii) by acquiring an interest directly from a limited liability company, or (iii) by acquiring an interest from a member of a limited liability company.

Statement of Authority

The New Law allows a limited liability company to file a statement of authority with the Ohio Secretary of State to state the authority of a specific party in a certain position to conduct business on behalf of a limited liability company. As such, where there is a statement of authority, it is no longer necessary to look to an operating agreement to determine who can conduct business on behalf of a limited liability company. Having a statement of authority will also limit the ability of third parties to enforce members’ and managers’ unauthorized decisions.

The Old Law did not provide for statements of authority but generally required parties transacting with a limited liability company to look to its operating agreement to determine who could conduct business on its behalf.

End of the Member-Managed and Manager-Managed Distinction

The New Law implicitly does away with the distinction between member-managed and manager-managed limited liability companies. A limited liability company no longer needs to make this distinction in its operating agreement, which was necessary under the Old Law.

Under the New Law, a manager is any party authorized to manage the activities of a limited liability company. Such a party does not need to be defined as a manager but can be called a director, officer, or anything else. This may allow for more flexible management structures, which the Old Law did not contemplate.

Mechanism for Barring Certain Claims after Dissolution

Known Creditors

Under the New Law, when dealing with known creditors, a dissolved limited liability company may give notice of its dissolution to known creditors, setting a deadline for them to bring their claims. Such a deadline may not be less than 90 days from the date of the notice. If the known creditors fail to bring their claims within that period, then their claims are effectively barred, protecting the dissolved limited liability company from those claims.

Unknown Creditors

Under the New Law, when dealing with unknown creditors, a dissolved limited liability company may now (i) publish a notice of its dissolution on its then maintained website, if any, and (ii) provide a copy of such notice to the Ohio Secretary of State for it to publish on its own website. If the dissolved limited liability company does so and requests that unknown creditors present their claims in accordance with the notice within two years from the date of publication (or if the statute of limitations runs during the two years), then those claims are effectively barred, protecting the dissolved limited liability company from those claims.

Under the Old Law, the dissolution of a limited liability company did not prevent the commencement of a proceeding against it.

Conclusion

The foregoing changes are only some of those seen under the New Law. If you need help navigating the New Law, it would be prudent to reach out to the Finney Law Firm. We can provide further guidance and a more in-depth explanation of the foregoing changes.  Contact Jennings Kleeman (513.797.2858) for assistance with your LLC or corporate affairs.

Today’s Wall Street Journal has an article about creative home buying by friends. Is this a good idea?

Well, economically, it could make sense.  A single person may not need a 4-bedroom home, but could easily share the cost of loan principal and interest, taxes, insurance, utilities and maintenance costs with another friend with the same housing needs. But what happens when one friend loses their job? Has a drug or alcohol problem? Has a bad boyfriend (or girlfriend)?  Likes to party too much? Gets a job out of town?  Gets married? Has a different standard for maintenance and improvements to the home? No longer can afford “their share” of the expenses?

Let us assure you that without documenting the agreement carefully laying out expectations and contingencies of the parties going forward, co-ownership (known as co-tenancy in Ohio law, as counterintuitive as that may sound) could turn out to be expensive and legally problematic.

The bottom line is that co-owners, whether buying as an investment or to live in the property, should have a clear understanding in advance and in writing as to (a) the standard of maintenance and who decides, (b) the division of monthly expenses, and (c) an exit strategy on death, disability, or one co-owner just wanting “out.”

Finney Law Firm has drafted many LLC operating agreements, corporate buy-sell agreements, and co-tenancy agreements. Contact  Eli Krafte-Jacobs (513.797.2853) or Jennings Kleeman (513.943.6650) for help with such an agreement.

Today, President Joseph Biden announced immediate and significant changes to the Paycheck Protection program, as follows:

  1. Priority period for businesses with fewer than 20 employees for two weeks starting this Wednesday, February 24th.
  2. Different loan (grant) calculation for sole proprietors and a set-aside of $1 billion for businesses in low- and moderate income areas.
  3. Made eligible those with non-fraud felony convictions.
  4. Made eligible business owners with student loan defaults.
  5. Made eligible all lawful U.S. residents with visas or Green Cards.

Forbes magazine has more details on these breaking developments here.

We are proud to announce that experienced real estate attorney Bruce G. Hopkins today joined the transactional group at Finney Law Firm. Bruce and Chris Finney practiced law together in the real estate group at Frost & Jacobs (now Frost, Brown Todd) at the beginning of their careers, so this is a long-delayed reunion of careers.

His practice is focused on retail and mixed-use projects, including development, leasing, resolution and litigation of disputes with tenants, purchases and sales, due diligence, management and operations matters.  He frequently works on investment-grade properties located across the United States.

Prior to becoming a lawyer, Bruce worked for almost a decade in the real estate industry doing commercial real estate appraisal work, commercial real estate lending and development for a major life insurance company, and commercial real estate development and management for a private developer.

Read more about Bruce here and let us know how Bruce can help your real estate project.

President Trump signed into law at the very end of 2020 another COVID-19 stimulus bill. Much of the writing about it has focused on the $600 direct payments to to individuals whose income falls below a certain thresholds. but this bill also contains important subsidies and changes for small businesses, including a new and significant second round of direct payments to small businesses payments under the Paycheck Protection Program (loans later forgiven).

Finney Law Firm attorney Rebecca L. Simpson will follow up on her blockbuster Spring performances on the initial PPP with information on the new stimulus programs, and be joined by Seth Morgan of the MLA Companies, a financial service and advisory group on Wednesday, January 13th from 6:00 to 7:15 PM via live webinar.

The Cincinnati Area Board of Realtors is also co-hosting the webinar.

Webinar topics include:

  • Second round PPP:
    • Amounts (including increased amounts for restaurants)
    • Eligibility (much tighter than round #1).
    • Expanded qualifying expenses for Round #2.
    • Forgiveness.
  • First and second round PPP tax deductibility.

Click here to register.

For assistance with the PPP or more information, contact Rebecca L. Simpson (‭513-797-2856). Also contact her if there is anything more we can do to help your small business.

We have been looking for details of the calculations of and eligibility for the second round of PPP in the most recent COVID stimulus bill. We found this excellent in article in Entrepreneur.Com here.

Some details from the article follow (note, since the PPP “loans” are forgivable, the word “loan” essentially means “grant” for most eligible businesses):

Qualifications:

  • A loss of revenue of 25% or greater, for any one quarter — comparing 2019 to 2020. If your firm had swings in revenue or had a pronounced one-quarter loss due to COVID or other causes, you may be eligible even if your annual revenue did not dip by 25%.
  • 300 employees or fewer.
  • Must have already used or plan to use their original PPP funding.

Loan terms:

  • Maximum loan limit of $2 million.
  • Loans of 2.5 months of payroll, which is the same as the original PPP. We are checking the legislation to see if the loan amount will change based upon increased payrolls from the original calculation (for example, if additional employees were added).
  • Restaurants food businesses (we are checking on the meaning of that term) qualify for 3.5 months of payroll as their loan amount.
  • Qualifying expenses are expanded from payroll and rent or mortgage payments in the original PPP to now include operating expenses, workplace protection costs to protect employees from COVID-19 and covered property damage.
  • Loan proceeds are not taxable and loan expenses are deductible (this is true for the new program and the original PPP payments).
  • Loans less than $150,000 have significantly simplified loan forgiveness (a one-page form).

For additional details on second round PPP loans, contact attorney Rebecca L. Simpson (513.797.2856) of Finney Law Firm.

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