Finney Law Firm attorney Eli N. Kraft-Jacobs

So, you have decided to cease operations, close down your business, and begin the process of dissolving your entity.  You know that there are formalities that must be attended to, but the what/when/how remains elusive.  The first step is to identify if the entity is a corporation or a limited liability company.  Notwithstanding some unique provisions of the Ohio Revised Code, and without discussing the process for nonprofit corporations, professional associations, or partnerships, the following is a general overview of the steps necessary to dissolve domestic corporations and limited liability companies in the State of Ohio.

Electing to Dissolve a Corporation:

A corporation may be dissolved voluntarily by the adoption of a resolution of dissolution by the directors or by the shareholders.  The requirements for dissolving the corporation by resolution of the directors differ from those for dissolving the corporation by the shareholders.

Once a resolution of dissolution has been adopted, and after obtaining the necessary tax clearance, a Certificate of Dissolution shall be prepared, which must include pertinent information for dissolving the corporation.  There are other notification requirements that must be met prior to filing the Certificate of Dissolution with the Ohio Secretary of State.

A corporation may also be dissolved judicially by either: (1) an order of the supreme court or a court of appeals or (2) an order of the court of common pleas in the county where the entity’s principal office is located.  If this is the path your company is taking, the good news is that the relevant court will, purposefully or otherwise, identify the things that need to be accomplished in order to dissolve and wind up the affairs of your company.  The bad news, of course, is that a court is ordering the dissolution of your entity and much of the process will be public record.  If the dissolution occurs pursuant to the supreme court or court of appeals, then the court may either: (a) order the directors to effectuate the dissolution and wind up the entity in the same manner as would occur during a voluntary dissolution or (b) direct the relevant court of common pleas to effectuate the same.  A court of common pleas may only order dissolution in an action brought by the shareholders, the directors, or the prosecuting attorney of the relevant county.

Regarding dissolution in a court of common pleas, if the action is brought by the shareholders, the court may only order dissolution if: (a) the articles have been canceled or the period of existence has expired, (b) the corporation is insolvent and dissolution is the only means through which to protect the creditors, or (c) the corporation has failed or is unable to meet its objectives.  If the action is brought by the directors, the court may order dissolution if there is an even number of directors who are unable to break a deadlock or there is an uneven number of directors, but the shareholders are deadlocked on a vote to elect new directors.  If the action is brought by the relevant prosecuting attorney, the court may order dissolution if it is found that the corporation was organized for, or otherwise engages in, activity including, but not limited to, the following:  prostitution; gambling; loan sharking; drug abuse or illegal drug distribution; counterfeiting; obscenity; extortion; corruption of law enforcement offices or other public officers, officials, or any employees; or any other criminal activity.

Electing to Dissolve a Limited Liability Company:

The process of dissolving a multiple member limited liability company (“LLC”) is similar to dissolving a corporation.  Regarding voluntary dissolutions, an LLC shall be dissolved upon the occurrence of any of the following: (1) the expiration of the period of existence as stated in the operating agreement or the articles of organization, (2) the occurrence of one or more events specified in the operating agreement as causing dissolution, (3) the unanimous written agreement of all members of the LLC, (4) the withdrawal of a member of the LLC unless otherwise stated in the operating agreement, or (5) a decree of judicial dissolution.  A Certificate of Dissolution must be filed with the Ohio Secretary of State in order to effectuate the dissolution of the LLC.

Regarding tribunal dissolutions, a tribunal may declare an LLC dissolved and order the business to be wound up upon the occurrence of any of the following: (1) an event making it unlawful for all or most of the business to continue or (2) a determination by the tribunal that any of the following is or are true: (a) the economic purpose of the LLC is likely to be unreasonably frustrated, (2) a member of the LLC has engaged in conduct relating to the business that makes it not reasonably practicable to carry on business with such member, or (c) it is not otherwise practicable to carry on the business.

The process for dissolving a single member LLC differs from the above process for a multiple member LLC.

Voluntary Winding Up:

Once an entity voluntarily elects to dissolve and files a Certificate of Dissolution with the Ohio Secretary of State, the relevant parties are authorized to proceed with the winding up of the corporation/LLC.  Winding up is the process of selling the assets of the business, paying off creditors, and distributing any remaining assets to the  members or shareholders in accordance with Ohio  law.  This is separate and distinct from a judicial or tribunal dissolution, during which the court will control the process of winding up.

There are some minor distinctions between LLCs and corporations with regard to the winding up process, but they largely follow the same path.

It is important to note that dissolution is not a magic wand with which one may avoid company liabilities.

While the dissolution process may seem straight forward, you should always seek legal counsel to ensure the I’s are dotted and the T’s crossed.

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

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

R.C. 1703.03.

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

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

R.C. 1703.29.

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

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

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

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

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

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

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

Attorney Julie M. Gugino

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

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

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

General Contract Principles

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

Standard contract language

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

Common law when contract is silent

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

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

Duty of contribution from co-makers

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

Somewhat surprisingly, the answer can be “yes.”

Hypothetical sale of stock

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

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

OK, but what about real property?

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

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

The basis for fraud?

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

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

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

The peril for the seller

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

Conclusion

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

What due diligence steps should a tenant undertake with respect to a commercial property before signing a lease?

Due diligence customary in a commercial real property purchase

Step back and consider for a moment that when we buy a piece of real property — for our home or for our business — it is prudent and customary by both the buyer and the lender to conduct due diligence investigations of the property:

  • title,
  • survey,
  • physical inspections of the structure and mechanical systems,
  • environmental, and
  • checks of governmental records for notices of liens for violations, zoning, traffic engineering, etc.

The list can seem endless.

Isn’t a commercial lease low-risk for the tenant?

But when simply signing a lease for a term of years, why should the tenant be concerned with these things?  After all, his upfront cash may not be significant (relative to a purchase) and if things don’t work out, the tenant can just leave, right?

Well, sometimes that is the case.  The cost and time needed for due diligence would outweigh the risk the tenant is undertaking by simply signing the lease and moving in.  If so, then by all means, proceed.

But, wait, consider this!

But consider these countervailing factors:

  • Tenant is spending significant monies on tenant buildout costs.
  • Tenant is spending significant monies to move, including moving of furniture, fixtures and equipment, the installation of computer and phone systems, and printing of letterhead, envelopes and business cards.
  • The disruption of your business arising from a move (and if things don’t work out a second move).
  • The image you are building at the new location.  What will be lost if a second move is necessary?  Think of a restaurant or bar, retail store,  or bank branch.  The location is intricately tied to a business’s identity in the mind of the consumer.  It may not be easy to just pick up and move.

The reality is that if the tenant does not undertake the kinds of due diligence implemented for a property purchase, he could “lose” the property in many of the same ways as in a purchase — i.e., he could lose the out-of-pocket costs associated with the activities noted above and have the inconvenience and loss to reputation by relocating to a second location.

The types of risk potentially borne by a tenant that due diligence could avoid

Indeed, in certain circumstances the tenant could be obligated to pay rent throughout the lease term, but the property cannot be occupied for its intended purpose.  (Consider a situation where the property cannot be occupied but where the landlord does not appear technically in default of his obligations under the lease.)

  • When signing a significant lease for property, a title examination, possibly a survey, and assuring lender buy-in of the lease can be absolutely critical.
  • If, for example, the landlord has a mortgage against the property, and the mortgage is in default, that lender legally can extinguish a later–signed lease concurrent with the foreclosure.
    • To avoid this risk, one asks a landlord to execute a subordination, non–disturbance and attornment agreement agreeing that so long as tenant makes prompt and full payment of rent (to the landlord or– when in default of the mortgage — to the lender), the lender or a successor buyer will honor the lease.
    • A tenant’s policy of title insurance can be issued, transferring that risk to a title insurer.
  • If the property does not comply with the regulatory requirements, zoning for example, of the jurisdiction in which the property is located, the tenant could be required to make extensive property modifications or to move.
  • If the property has environmental problems, the cost of compliance — in an unlimited manner — could be transferred to the tenant.
  • If the property has structural problems or the HVAC system is old and inoperable, depending on the lease language (shifting repairs and replacement of the HVAC to the tenant), the burden of fixing the problem could fall to the tenant.

Conclusion

Many times tenants will assume these risks in smaller leases.  Negotiating with the landlord’s lender and conducting full-scale inspections and other due diligence may just not be practical.

But a tenant in a commercial setting should carefully consider the risk-benefit to foregoing certain due diligence steps to prudently protect their investment in their new premises.

Call Isaac Heintz (513-943-6654) or Eli Krafte-Jacobs (513-797-2853) to address your commercial leasing questions.

 

In a commercial lease than can run 15 to 25 pages (single spaced) or more, there can be trips and traps for both landlord and tenant.  Thus, both should carefully consider not just the major financial and business terms, but even “throw away” or boilerplate provisions.  In the alternative, each party should carefully perform his due diligence before undertaking lease obligations.

We recently represented a tenant in a commercial lease in which the lease — as is common in landlord-written leases — obligated the tenant to “comply with all laws throughout the term of the lease.”

In this instance, our client was a medical user.  The zoning jurisdiction of the property differentiated minimum parking requirements for medical office uses versus general office uses.  The consequence of that differentiation for our medical office client was that the space simply would not comply with zoning requirements for our client’s use.

In other words, he could not “comply with all laws.”

The problem was complicated and compounded because (a) the landlord applied for the building permit on which he represented to the zoning authority that the premises would be “general office” uses and (b) $75,000 in buildout work had been completed before the non-compliance was discovered.  Further, the landlord originally solicited tenant to occupy the premises and at least implicitly represented that it would comply with zoning requirements for the tenant’s use.

The zoning authority simply would not permit the occupancy contemplated by the lease.

In this circumstance, is the tenant in breach and therefore responsible for the tenant build-out costs and rent payments until the premises can be re-rented?  Is the landlord in breach of the lease and responsible for the damages the tenant suffered because he could not timely occupy the premises?

It candidly was vague.  There was no clear answer, and the problem was significant for the client and the landlord.  Ultimately, the parties agreed upon a fair settlement of the issues.

But the situation highlighted the critical importance of each and every provision of the lease, even “throw away” provisions.

When banks and other lenders make a loan for real estate financing, they typically take back from the borrow a promissory note (promising to re-pay the sums borrowed) and a mortgage against the real estate financed (securing the payment of the loan).

And under that scenario, even a borrower in default has certain rights as against the lender.

First, there is a statutory right of redemption of the property in the foreclosure process under O.R.C. Section 2329.33:

…in sales of real estate on execution or order of sale, at any time before the confirmation thereof, the debtor may redeem it from sale by depositing in the hands of the clerk of the court of common pleas to which such execution or order is returnable, the amount of the judgment or decree upon which such lands were sold, with all costs, including poundage, and interest at the rate of eight per cent per annum on the purchase money from the day of sale to the time of such deposit, except where the judgment creditor is the purchaser, the interest at such rate on the excess above the judgment creditor’s claim. The court of common pleas thereupon shall make an order setting aside such sale, and apply the deposit to the payment of such judgment or decree and costs, and award such interest to the purchaser, who shall receive from the officer making the sale the purchase money paid by the purchaser, and the interest from the clerk. …

Second, the borrower has the right to the net proceeds from the foreclosure sale beyond the court costs and the amount due to the lender (i.e., any built-up equity in the property belongs to the borrower).

Finney Law Firm alleges in a recent class action complaint that Cincinnati companies Build Realty, Inc., Edgar Construction LLC, and certain investors associated with them have created a tremendously complicated scheme to impermissibly attempt to deprive a broad group of real estate investors of these statutory rights in the lender/borrower relationship.

From the Complaint:

This case involves a complex business scheme where Defendant Build Realty, Inc. and Defendant Edgar Construction LLC solicit investors to purchase and improve real property from/through them under a fraudulent structure, prohibited by Ohio law. To effectuate this transaction, Edgar Construction, LLC (“Edgar Construction”), purchases certain real property from a third party, then immediately resells the property at a higher price to itself as trustee of a trust under which the investor is the beneficiary. Edgar Construction’s affiliated entity, Build Realty, Inc. (“Build Realty”) agrees to lend the investor the afterrenovation-value of the property, including the higher purchase price and an additional amount for improvements (held in escrow). As part of this transaction, the investor, Build Realty, and/or Edgar Construction simultaneously execute numerous agreements, under which the investor is obligated as a mortgagor and borrower on a note for the amount loaned by Build Realty. One of the documents signed during this transaction also purports to allow Defendants to reclaim the property, extinguishing the investors’ rights therein, upon any default and without the opportunity for cure or any subsequent foreclosure or deed in lieu of foreclosure.
The Ohio Supreme Court and courts throughout the state have recognized the structure of the Transaction as an improper clog on the right to redemption. Additionally, the Transaction is fraudulent, void for unconscionability and as against public policy, and involves numerous breaches of the fiduciary duties owed to the investors (which are the beneficiaries of the trusts). This Transaction effectively allows Defendants to profit at the expense of their investors/beneficiaries, including (i) the retention of the down payments paid on the properties, (ii) the difference in the purchase  price that Edgar Construction paid and the purchase price for the conveyance from Edgar Construction to Edgar Construction, as trustee, and (iii) any foreclosure proceeds the investor(s) would have realized.

The Class Action Complaint seeks compensatory damages and disgorgement of profits, punitive damages and a declaration that such transactions by these defendants are impermissible under Ohio law.

For more information on this suit, contact attorney Casey Taylor at (513) 943-5673 or Casey@FinneyLawFirm.Com.

Read the Complaint below:

[scribd id=361337320 key=key-OJYq4EbWIW6tGQ0DCh7f mode=slideshow]

 

Casey Taylor write on Ohio commercial real estate brokerage liens
Casey Taylor, attorney

Our firm has previously written on the creative ways one can shield his or her personal assets through the corporate or limited liability structure. As noted in that entry (Link Here), “Ohio courts and courts throughout the nation have been pretty vigilant in protecting the corporate veil of owners of corporations and limited liability companies.”  However, this general principle is not without a couple of narrowly drawn exceptions, explored below.

Formation of LLCs

The Finney Law Firm deals regularly with clients and other parties that are organized as limited liability companies (“LLCs”) or corporations.  After all, these entities are fairly simple to create – one must simply fill out an online form or two, submit a relatively small fee to the Secretary of State, and they are then able to transact business without fear of personal liability, right? Maybe not.

The powerful “corporate veil” protection of an LLC

Generally, an LLC member cannot be held personally liable for the torts or contractual obligations of the LLC solely by virtue of his or her membership in the LLC. City of Lakewood v. Ramirez, 2014-Ohio-1075, ¶ 11 (8th Dist. 2014). Thus, if an LLC defaults on its obligations under a contract, an adverse party cannot obtain judgment against the LLC members’ or managers’ personal assets.  It is for this reason, along with its ease of formation, that the LLC structure is so desirable to many. And, most of the time, it succeeds in its purpose of precluding judgment against the members’ personal assets.

Narrow exceptions

However, there are two sets of circumstances under which the limited liability structure does not shield members from personal liability.

1.   Piercing the corporate veil

The first is where the court deems it proper to “pierce the corporate veil,” thereby removing that protection of limited liability.

[I]n order to pierce the corporate veil and impose personal liability upon [members or managers], the person seeking to pierce the corporate veil must show that: (1) those to be held liable hold such complete control over the corporation that the corporation has no separate mind, will, or existence of its own; (2) those to be held liable exercise control over the corporation in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.

Stewart v. R.A. Eberts Co., 2009-Ohio-4418, ¶ 16 (4th Dist. 2009), citing Belvedere Condominium Unit Owners’ Ass’n v. R.E. Roark Cos., 67 Ohio St. 3d 274, ¶ 3 of the syllabus, 617 N.E.2d 1075 (1993).  The idea behind piercing the corporate veil is that there is so little separation between the individual and the LLC, that they can almost be considered “alter-egos” such that it is not unreasonable to hold the member or manager of the LLC personally liable for the debts, obligations, and/or liabilities of the LLC.

2.  Member’s own acts, ommisions or fraud

The second instance where a member can be held personally liable notwithstanding the limited liability structure is where the members’ own acts or omissions constitute fraud. R.C. 1705.48; See also Deitrick v. Am. Mortg. Solutions, Inc., 2007-Ohio-839, ¶ 19 (10th Dist. 2007) (finding that a “corporate officer can be individually liable in tort if the promises contained in the contract are fraudulent” and “even if he commits the fraud while in the course of his corporate duties”); Stewart, at ¶ 30 (“[N]either the corporate shield, nor a shield of limited liability insulates a wrongdoer from liability for his or her own tortious acts.”). Additionally, this second instance is not contingent upon the first (i.e., a litigant who seeks to hold an LLC member personally liable for the member’s own fraud need not first pierce the corporate veil in order to do so).  Yo-Can, Inc. v. Yogurt Exch., 149 Ohio App. 3d 513, 527 (7th Dist. 2002) (“[P]laintiffs need not pierce the corporate veil to hold individuals liable who allegedly personally commit fraud.”).

Conclusion

Thus, while the LLC or corporate structure are very successful at providing owners/members with a great deal of protection the overwhelming majority of the time, one shouldn’t make the mistake of thinking his or her personal assets are entirely immune regardless of the circumstances.

How do I obtain an Ohio commercial real estate broker lien?

Attorney Casey Taylor

First, let’s be clear: There is no lien right for real estate brokers for property consisting solely of between one and four residential units. (O.R.C §§1311.85 and .86).

However, licensed real estate brokers do have lien rights in transactions involving commercial properties, i.e., anything other than between one and four residential units.  (O.R.C §§1311.86).

The lien rights extend to brokerage contracts for the provision of services for selling, purchasing, and leasing.  (O.R.C §§1311..86(A) and (B)).  They do not appear to cover the provision of property management services.

What is a lien?

In one sense, a lien does not get you anything more than the contract rights you already have: You have a signed listing agreement, you have earned your commission, you can sue in a court of competent jurisdiction, and you can thus get paid the amount of money you are owed.

But as a practical matter, lien rights are tremendously powerful in “turning the tables” on a property owner, giving quick, inexpensive and powerful leverage to the Realtor to resolve a commission dispute.

Why is a lien important?

Leverage often is the “whole ballgame.”  So often, (a) debtors will avoid debts they clearly owe just because they can, for purposes of the time-value of money (by delaying the payment, they can use your money in the interim) and (b) the reality is that most creditors will not go to the trouble and expense of hiring and paying an attorney to collect the sums owed to them.

Litigation can cost as little as $20,000 per case, up to hundreds of thousands of dollars for a vigorously-contested action.  So, the question for a Realtor claiming a commission is: Can I “check” or “checkmate” a property owner (seller or landlord) into recognizing, dealing with and paying my claim without the two years and tens of thousands of dollars in legal fees needed to vindicate that right?

A lien is a powerful tool — it encumbers real property

A lien is an encumbrance on real property.  In most cases, real property encumbrances have the same priority of the order of filing, i.e., the first-filed is paid first from the sale proceeds, the second, second and so forth.  (Ohio mechanics liens are the major exception to this rule, dating back to the date of first work on a project.)

This gives the lien holder two distinct advantages, many times powerful advantages: (a) their claim is secured against the real estate (i.e., the owner cannot further squander the equity in the property by a sale or mortgage) (b) the claimant has placed a cloud on the title with what may still be a disputed claim, effectively preventing the owner from selling or mortgaging the asset until the earlier of (i) the statutory expiration of the lien or (ii) the judicial disposition of the claim and the lien rights.

Thus, as a practical matter if the property owner wants to sell his property or take out a new mortgage or refinance an existing mortgage, he will have to “deal with” the Realtor’s claims before doing so.

A broker’s lien is unilateral — it does not require the owner’s signature or consent

Contrary to what many clients ask of us in a simple contract or tort claim (“please lien their property”), in most circumstances a lien cannot be placed against real property until either (a) the owner signs a voluntary instrument such as a mortgage or (b) the conclusion of litigation, which usually takes years.  In the meantime, a defendant can sell and mortgage the property, or otherwise encumber it, and then squander the asset without concern for the plaintiff’s claims.  (This is constrained by concerns about fraudulent conveyance issues that will be discussed in another blog entry later.)

The right to place a unilateral lien against real estate is very narrow, being limited to government liens (such as tax liens, assessments, environmental liens, etc.) and mechanics liens (for work done on real property and materials delivered to real property for incorporation therein).

Commercial brokerage lien rights

O.R.C. §1311.86 provides such unilateral lien rights for the collection of a commission in commercial transactions in specific circumstances set forth in the statute.  Being a unilateral filing, means that the Realtor claiming the lien simply signs and files a piece of paper in the Hamilton County Recorder’s office.  It does not require a signature (on the lien filing) of the property owner.

Statutory requirements

Because the lien arises from the statute, strict compliance with the statutory mandates will be required.  F. W. Winstel Co. v. Johnston, 103 Ohio App. 525, Paragraph 1 of the Syllabus (1st Dist. 1957).         These are set forth in O.R.C. §1311.86:

  • It is for written brokerage contracts only (O.R.C. §1311.86(A) and (B)).
  • It is for “for services related to selling, leasing, or conveying any interest in commercial real estate” (O.R.C. §1311.86(A)) and “for services related to purchasing any interest in commercial real estate.” (O.R.C. §1311.86(B)).
  • “The lien is effective only if the contract for services is in writing and is signed by the broker or the broker’s agent and the owner of the lien property or the owner’s agent.”   (O.R.C. §1311.86(A) and (B)).
  • The lien is for the broker only, not his salespersons.  (O.R.C. §1311.86(C)(1).
  • The lien amount is either the brokerage commission due, or if due in installments only that portion due on conveyance.  (O.R.C. §1311.86(C)(2) but in the case of commercial leasing, (O.R.C. §1311.86(C)(3).
  • Only the property subject to the brokerage agreement can be liened.  ((O.R.C §§86(C)(5)).
Lien contents

To perfect a lien, the following steps must be followed:

  • The claimant must prepare, sign and have acknowledged (notarized) an affidavit containing each of the following: (a) name of the broker who has the lien, (b) the name of the owner of the lien property, (c) a legal description of the lien property, (d) the amount for which the lien is claimed, (e) the date and a summary of the written contract on which the lien is based, and the real estate license number of the broker. R.C. 1311.87(B)(2).
  • Additionally, the lien affidavit must state that the information contained in the affidavit is true and accurate to the knowledge of the broker. Id.
Lien deadlines

The timeframes within which a commercial broker’s lien must be filed are:

  • For a sale of liened, the Affidavit must be recorded prior to the conveyance of the property. R.C. 1311.86 (B)(3).
  • For a purchase of liened property the Affidavit must be recorded within ninety days after the conveyance of the property. R.C. 1311.86 (B)(4).
  • For liens based upon a leasing commission, the Affidavit must be recorded within ninety days after a default by the owner in payment. R.C. 1311.86 (B)(5).
Notice to property owner

One other requirement not to overlook:  “On the day the lien affidavit is recorded, the broker shall provide a copy of the lien affidavit to the owner of the lien property and, where a contract for the sale or other conveyance of the lien property has been entered into, to the prospective transferee, where known, either by personal delivery or by certified mail, return receipt requested. O.R.C. 1311.86 (B)(6).

Be careful — “Slander of title” claims can be nasty

If one files a lien against real property that is later determine to have been in bad faith, the lien claimant can find himself the target of a suit for a cause of action known as “slander of title.”  Slander of title is the tort of impairing title to someone’s real estate without a reasonable basis therefor. McClure v. Fischer Attached Homes, 2007-Ohio-7259, ¶ 21, 882 N.E.2d 61 (Clermont Co. C.P. 2007), citing Green v. Lemarr, 139 Ohio App. 3d 414, 433 (2d Dist. 2000).

The really bad part of a slander of title claim is that it can include an award to the property owner of an award of his attorneys fees and a punitive damages amount. Additionally, the commercial brokerage lien statute specifically allows for the prevailing party to recover its attorney’s fees. O.R.C. 1311.88(C) (“[A] court may assess the nonprevailing parties with costs and reasonable attorney’s fees incurred by the prevailing parties.”). However, in cases involving general slander of title claims (i.e., outside of the commercial brokerage lien context), the attorney’s fees have been limited to the those “necessary to counteract a disparaging publication,” and did not include those incurred in prosecuting the slander of title. Cuspide Props. v. Earl Mech. Servs., 2015-Ohio-5019, ¶ 40 (6th Dist. 2015).

Thus, we recommend moving forward with the filing of an affidavit for a commercial broker’s lien cautiously, only where the broker is certain of the merits of his position and even then still willing to withstand the possible claim for slander of title from an owner.

Conclusion

The Finney Law Firm is privileged to have many real estate brokerage clients, including commercial Realtors.  The commercial lien right is a very powerful one, and one that we think is under-utilized in commission disputes.

Consider one of our attorneys to assist you in such a dispute, including the use of the right to a commercial lien.