Ohio Dept of Natural Resources: Recent Regulatory Notices, Rule Announcements and Updates


ODNR regulatory news:

NOTICE TO WELL OWNERS re: tubular goods (3/31/2015)—

The requirements of R.C. 1509.16 became effective March 31, 2015. The statute was enacted by Am. Sub. H.B. 59 of the 130th General Assembly. Well owners are required to file a disclosure form with the Division of Oil and Gas Resources Management that specifies the country of manufacture for tubular goods initially used in a production operation on or after March 31, 2015 unless that country cannot be determined. Tubular goods are defined as seamless or welded steel pipe used in drilling for oil and gas and include casing, tubing, drill pipe, couplings, and drill collars.

The division, in consultation with members of the oil and gas and steel industries, developed Form 15 that is to be used to report the total length of each tubular good used in wells drilled on and after March 31, 2015. Beginning in calendar year 2016, well owners must file the form with the division on or before March 31. On the form, the well owner must report the length of all casing, tubing, drill pipe and drill collars used in wells drilled in the previous calendar year and the country in which each of those goods was manufactured.

Copies of Form 15 can be found on the division's website at: http://oilandgas.ohiodnr.gov/industry/electronic-forms

Electronic submittal can be sent to: O&G.Tubulars@dnr.state.oh.us

Fax submittal can be sent to: 614-265-6910

Submittal by mail can be sent to:
Ohio Division of Oil and Gas Resources Management
2045 Morse Road-Building F-2
Columbus, OH 43229-6693

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HORIZONTAL WELL SITE CONSTRUCTION RULE ANNOUNCEMENT (3/24/2015)

ODNR's Division of Oil and Gas Resources Management is proposing new rules that address the design and construction of horizontal well sites. There will be a public hearing at the Ohio Department of Natural Resources, Building E-1 Assembly Center at 2045 Morse Road in Columbus, Ohio 43229 on April 23, 2015 starting at 10:00 a.m. At the hearing, any person affected by the proposed rule may present their comments orally or in writing. For more information about the proposed rule, or to view the proposed rule, click here. To sign up for future notifications about rule progress and opportunities for input, click here.

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State Updates Water Well Sealing Document (4/7/2015)
The State Coordinating Committee on Ground Water has updated the technical guidance document for sealing unused water wells.

In 2013, a workgroup was formed to re-write/edit the original document. This document is the product of the workgroup. The workgroup consisted of representatives from the drilling industry, the major grout manufacturers, and state agencies dealing with ground water. Monthly meetings were held for 13 months to revise the original 1996 technical guidance document. Some of the key changes include:

  • A table (Table 1) that lists different types of wells, the regulatory agency, if regulated, and the applicable regulation or guidance (page 2).
  • An appendix that contains associated links to the OAC or ORC (Appendix 2).
  • An emphasis on hiring or at least consulting a contractor before sealing a well. (Any well owner can seal their own well.)
  • The Preparation for Sealing section (pages 13-19) was expanded to include a table of possible concerns and the corresponding state or federal agency that may have information. A new Procedure Planning sub-section (pages 18-19) was created that lists all the items that should be in the plan before the well is sealed.
  • The cement-based grouts section (pages 20-26) was expanded to include a discussion on situations where bentonite grouts are not effective due to water quality conditions in the well to be sealed.
  • The General Sealing Procedures section (page 31) was expanded and the steps were numbered.
  • The specific well sealing procedures for dug wells and bucket auger wells were separated because ODH has different sealing procedures for these types of wells.
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Use Real Estate Leases Effectively in Chapter 11 Situations

Reprinted with permission by author: Joel H. Schneider, Senior Vice President, Hilco Real Estate, LLC

Owner-occupied real estate can be an untapped source of balance-sheet value for bankrupt companies. Such real estate assets provide a potential catalyst for exiting bankruptcy successfully or a financial carrot to motivate prospective strategic or financial buyers.

Currently, real estate investors are clamoring for stabilized properties occupied by creditworthy tenants. The competition for income-producing real estate assets has caused capitalization rates to nosedive in recent years. Today, properties in many real estate categories, such as industrial, are priced at cap rates below the 2007 peak.
This article reviews two cases where bankrupt companies enhanced the value of their owner-occupied real estate. Through new lease agreements that included higher rents, reimbursement of expenses, and multiyear lease terms, substantial cash flow streams were created. The properties were then marketed via auctions to maximize recoveries, and sale proceeds were used to expedite the reorganization process, satisfy creditors, and/or hasten the successful sale of the go-forward enterprise.

A Reorganization
Giordano’s, the Chicago-based deep dish pizza retail chain, filed Chapter 11 bankruptcy in 2011 after defaulting on approximately $45.5 million in loans.
As part of the filing, the company listed 20 parcels of owned real estate associated with corporate and franchised restaurants. Of the 20 parcels, 10 were considered operationally significant to the go-forward business, including a high profile 139,000-square-foot mixed-use property that served as the company’s corporate headquarters and flagship restaurant location. One of the keys to this situation was to position the Giordano’s real estate to take advantage of a re-capitalized corporate balance sheet to encourage buyer interest in buildings occupied by a ”reconstituted” Giordano’s.
Hilco Real Estate worked with the debtor to restructure the company’s leases to make them more attractive and marketable, while concurrently crafting a plan to market the properties to the largest possible real estate investment market. Prior to the lease restructurings, initial bids for the real estate had yielded offers around $20 million. When the newly leased properties went to auction, 14 qualified bidders were at the table. After 13 hours of spirited and contentious bidding, the properties sold for more than $30 million. Proceeds from the real estate sale along with the sale of the operating business yielded nearly $66 million, which enabled the estate’s secured creditor to be paid in full.

A Sale Scenario
The degree of interest in acquiring a bankrupt company, either by a strategic buyer such as a competitor or a financial buyer such as a private equity firm, is often influenced by real estate. In many cases, the potential acquirer plans to maintain operations in the buildings, but does not want to be in the real estate business or simply does not want to use additional capital to buy the buildings.

By structuring new leases based on go-forward tenancy in the building, a valuable asset for the estate is created, which enables the debtor or the acquirer to offer a fully leased building to the investment marketplace.
Based in suburban Chicago, Qualteq was a market leader in manufacturing plastic credit and gift cards for companies such as American Express, Visa, and MasterCard. The owner’s personal financial difficulties forced Qualteq into Chapter 11 in 2013. The bankruptcy trustee and his financial advisers first stabilized the company, then sold the business to Brazil-based Valid S.A. through a Bankruptcy Code Section 363 bankruptcy sale. However, Valid had no interest in purchasing the four buildings Qualteq occupied.

Working in tandem with the bankruptcy trustee and advisers, Hilco structured new, five-year leases on each of the four buildings with Valid as the tenant, based on the strong balance sheet that was created with Valid’s purchase, enabling Qualteq to continue operations in their current facilities.

Prior to the finalization of the new leases and with no certain commitment from Valid to remain as a tenant, there was no immediate interest from the real estate investment community for four potentially vacant industrial buildings. Once the new leases were finalized, the leased buildings were then put through a sale process by Hilco, which garnered significant interest from third-party investors. Stalking horse bidders were obtained for each property, followed by an auction. Hilco estimated the four buildings, on an empty basis, were valued at approximately $10.5 to $12.5 million. When the gavel came down, the auction resulted in total sales of almost $19 million for the four fully occupied buildings.
Utilizing the real estate as a vehicle to enhance value further ensured that the estate achieved maximum value of the Qualteq business/assets and helped to secure a successful transaction with Valid. Furthermore, the added value created by selling buildings occupied by a quality credit tenant resulted in sufficient proceeds to fully pay all mortgage holders.

Whether a company in Chapter 11 reorganizes and exits from bankruptcy on its own or is acquired by a strategic or financial buyer, the real estate occupied by the business can be transformed into a value enhancer. By recasting leases with a strong tenant and aggressively marketing the properties, a significant amount of incremental cash can be generated to benefit the bankruptcy estate in a reorganization and/or a going-concern sale. In bankruptcy, debtors and creditors should regard companies’ real estate as a value-creation tool, not an illiquid liability.

Joel H. Schneider is senior vice president, dispositions, for Hilco Real Estate, LLC, a unit of Hilco Global. You can contact Joel at jschneider@hilcoglobal.com.

Hilco Real Estate (www.hilcorealestate.com) advises and executes strategies to help both healthy and distressed clients maximize the value of their real estate assets. Their extensive property valuation knowledge, lease renegotiation experience and innovative sales strategies are leveraged by substantial access to capital, a vast network of tenants/landlords and motivated buyers/sellers. Services include real estate lease repositioning and advisory solutions; extensive real estate disposition services through an expert brokerage team as well as high-performance accelerated property auctions-live, online, sealed bid; a sale/leaseback advisory practice with unique deal structuring; and, real estate investments including acquisition deals for vacant, value-add, or stable income-producing properties as well as joint venture transactions. Hilco Real Estate is part of Northbrook, Illinois based Hilco Global (www.hilcoglobal.com), a world-wide leading authority on maximizing the value of business assets by delivering valuation, monetization and advisory solutions to an international marketplace. Hilco Global operates more than twenty specialized business units offering services that include asset valuation and appraisal, retail and industrial inventory acquisition and disposition, real estate and strategic capital equity investments.


Ohio Supreme Court: OEPA Must Follow Rulemaking Procedure For New TMDLs Before Submitting To US EPA




On March 24, 2015, the Ohio Supreme Court issued its decision in Fairfield Cty. Bd. of Commrs. v. Nally, Slip Opinion No. 2015-Ohio-991, in which the court held that --

  1. A total maximum daily load established by the Ohio Environmental Protection Agency (OEPA) pursuant to the Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq. (the Clean Water Act), is a rule that is subject to the requirements of R.C. Chapter 119 of the Ohio Administrative Procedure Act; and
  2. The OEPA must follow the rulemaking procedure in R.C. Chapter 119 before submitting a total maximum daily load (TMDL) to the United States Environmental Protection Agency (USEPA) for its approval and before the TMDL may be implemented in a National Pollution Discharge Elimination System (NPDES) permit.

This case involved a challenge brought by Fairfield County regarding a renewed NPDES permit issued by the OEPA back in 2006 to a wastewater treatment place that discharges into Blacklick Creek.  The renewed permit included new phosphorus limitations that were not previously included in the county's permit. The county contended that it should have had a 'full and fair' opportunity to be heard and the right to review and challenge the TMDL before it was submitted to the USEPA for approval. The Ohio Supreme Court agreed affirming the judgment of the court of appeals that had vacated the NPDES phosphorus limitations but for different reasons.

The court of appeals and the Environmental Review Appeals Commission (ERAC) before it had both determined that OEPA had a right to impose the new limits in a renewed NPDES permit without following Ohio's Administrative Procedures Act (the APA) but vacated the limits and remanded to the OEPA for further consideration due to the OEPA's failure to consider with the new permit limits on phosphorus were technologically feasible and economically feasible as required by R.C 6111.03(J)(3).

The OEPA denies that the TMDL is a rule and characterizes it as simply guidance. The court has previously held that the Ohio EPA "cannot regulate through 'guidelines' that are in reality rules requiring formal promulgation" (Jackson Cty. Environmental  Commt. v. Schregardus, 95 Ohio App.3d 527, 642 N.E.2d 1142 (10th Dist. 1994)). When reviewing guidelines or other 'documents' the court has long emphasized that it will look at such guideline or document's effect not how an agency or other governmental entity chooses to characterize it.

When determining that the establishment a new TMDL is a rule requiring the OEPA to follow Ohio's APA, the court notes that it creates new legal obligations, and the standards have general and uniform effect even though they will not be implemented against a point source (such as a wastewater treatment facility) until an NPDES permit is issued.  The court further noted that the USEPA itself is required to proceed through rulemaking when it establishes its own TMDLs and other state supreme courts (ID; SC) have addressed this issue, finding that TMDLs must be promulgated as rules before becoming the basis for discharge limitations in a permit.

Justices O'Donnell and Kennedy, while concurring in the result, did so on the grounds held by ERAC and the court of appeals. In the concurrence prepared by Justice O'Donnell, he noted that the OEPA has issued 1,761 TMDLs, including 132 TMDLs for phosphorus.  Since the OEPA did not follow the Ohio APA for any of these TMDLS, this court's decision for Fairfield County essentially invalidates all of these TMDLs and opens up all of the permits for challenges.

I sympathize with Justices O'Donnell's and Kennedy's concern over the repercussions of this decision. However, in a time when private citizens, including private business, are being subjected to an ever increasing rules and regulations from all levels of government, it's important to all of us that the government is made to follow the rules as well. Only time will tell what the fallout is from this decision.
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Pending Real Estate Legislation in the Ohio Legislature


Spring is finally in the air and that means, among other things that the Ohio Legislature (https://www.legislature.ohio.gov/) is in session. The bills of the 131st General Assembly pending in the Ohio House and Ohio Senate related to real estate are as follows:

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HB 18
To amend sections 5301.072 and 5311.191 and to enact sections 4781.401 and 5321.131 of the Revised Code to prohibit manufactured homes park operators, condominium associations, neighborhood associations, and landlords from restricting the display of blue star banners, gold star banners, and other service flags, and to prohibit manufactured homes park operators and landlords from restricting the display of the United States flag.

HB 77
To amend sections 4740.01-4740.06, 4740.061, 4740.07- 4740.10, 4740.101, 4740.12, 4740.13, 4740.131, 4740.15, 4740.16, and 4740.99 and to enact sections 4740.18- 4740.21 of the Revised Code to require statewide registration of home improvement contractors, to modify the membership of the Ohio Construction Industry Licensing Board, and to make an appropriation.

SB 84
To amend sections 4781.40, 5301.072, and 5311.191 and to enact section 5321.131 of the Revised Code to prohibit manufactured homes park operators, condominium associations, neighborhood associations, and landlords from restricting the display of Ohio flags and blue star banners, gold star banners, and other service flags, and to prohibit manufactured homes park operators and landlords from restricting the display of the United States flag.

SB 85
To amend sections 307.699, 3735.67, 5715.19, 5715.27, and 5717.01 of the Revised Code to limit the right to initiate most types of property tax complaints to the property owner and the county recorder of the county in which the property is located.

SB 96
To amend section 5715.39 of the Revised Code to waive any penalty due with respect to unpaid property taxes resulting when a mortgage lender fails to notify the county auditor of a satisfied mortgage.

SB 104
To amend sections 505.86 and 3929.86 of the Revised Code to provide owners and lienholders of insecure, unsafe, or structurally defective or unfit buildings with a right to a hearing before the board of township trustees proceeds to remove, repair, or secure the buildings.

SB 108
To amend section 5323.04 and to enact sections 525.01- 525.04, 525.99, and 5715.111 of the Revised Code to permit townships to require owners of residential rental property located within the township to register certain information with the board of township trustees.

SB 109
To enact sections 5755.01 to 5755.12 of the Revised Code to authorize townships to levy impact fees on new development to finance capital improvements necessitated by that development.

SB 112
To amend section 3781.109 of the Revised Code to require public buildings to have at least one rest room facility with an adult changing station.

HB 114
To amend section 3737.84 and to enact section 3781.106 of the Revised Code to require the Board of Building Standards to adopt rules for the use of a barricade device on a school door in an emergency situation and to prohibit the State Fire Code from prohibiting the use of the device in such a situation.



Ohio Supreme Court Decides in Favor of Beck Energy; Local Drilling Ordinances Not a Valid Exercise of Home Rule


The Ohio Supreme Court decided a critical case in February affecting the state’s oil and gas drilling industry when it issued its decision in State ex rel. Morrison v. Beck Energy Corp (Slip Opinion No. 2015-Ohio-485) on February 17, 2015.
 
Beck Energy Corporation (“Beck Energy”) obtained a state permit to drill an oil and gas well on private property in the city of Munroe Falls (the “City”), located in Summit County.  The City attempted to block Beck Energy from drilling the well despite its state permit based on its own ordinances. The permit  was issued to Beck Energy by the Ohio Department of Natural Resources (“ODNR”) under O.R.C. 1509.02.  It contained 67 separate conditions, including many that addressed issues related to site preparation, pit construction and waste disposal, along with many others that govern “Urbanized Areas,” such as noise mitigation, erosion control, tree trimming and parking. Beck Energy, as an applicant for a drilling permit, was also required to provide notices to each owner within 500 feet of the well’s surface location, as well as to the municipality where the well was to be drilled.
 
The City issued a stop-work order and sought an injunction against Beck Energy alleging that the company was violating the City’s ordinances. The appeal to the Ohio Supreme Court involved 5 of these ordinances; including a general zoning ordinance and 4 ordinances that specifically relate to oil and gas drilling. Violations of these drilling ordinances constitute misdemeanors and could result in jail time and fines, with each day of the violation being a separate offense.
 
Beck Energy opposed the City’s injunction request which was granted by the trial court but overturned by the court of appeals.  The City appeals to the Ohio Supreme Court who addressed the question as to whether the City’s ordinances represented a valid exercise of its home-rule power.
 
The home rule amendment to Ohio’s constitution gives municipalities the “broadest possible powers of self-government in connection with all matters which are strictly local and do not impinge upon matters which are of a state-wide nature or interest.” (State ex rel. Hackley v. Edmonds, 150 Ohio St. 203, 212, 80 N.E.2d 769 (1948))  However, a municipality is not allowed to exercise its police powers in a manner that conflicts with general laws. In those instances, it must yield to the state’s law.
 
In reaching its decision that the City’s ordinances must yield to O.R.C. 1509.02, the Ohio Supreme Court followed a 3 step analysis: (1) is the ordinance an exercise of the police power rather than of local self-government, (2) the statute is a general law, and (3) the ordinance is in conflict with the statute.
 
In this case, the City did not dispute that its ordinance involved the exercise of police power rather than local self-government. The court then found that O.R.C. 1509.02 is a general law as it (1) is part of a statewide comprehensive legislative enactment, (2) applies to all parts of the state alike and operates uniformly throughout the state, (3) sets forth policy, sanitary or similar regulations, and (4) prescribes a rule of conduct upon citizens generally. The court noted that just because a state statute will have more impact in one geographic section of the state over others does not prevent it from being a ‘general law’.
 
Finally, the court found that the City’s ordinances conflict with the state’s statute. An ordinance conflicts with a state statute when it permits or licenses that which the statute forbids and prohibits, and vice versa. In this case, the City’s ordinances prohibited a permit that was lawfully issued by the state under O.R.C. 1509.02 and attempts to provide for double licensing which is not permitted under the state statute.
 
Finding a balance between home-rule authority and state regulatory authority is difficult, even without the added controversy of fracking. Under the circumstances, it comes as no surprise that the Ohio Supreme Court’s decision in favor of Beck Energy was issued by a divided (4-3) court. It will be interesting to see what transpires in the future on this subject.
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Aladdin and the Vacancy Exclusion

On one level, the granting of Aladdin’s wishes by the Genie is a lot like insurance coverage today.
Aladdin: You're gonna grant me any three wishes I want, right?
Genie: Uh, almost. There are a few, uh, provisos, a, a couple of quid pro quos.”

When you make a wish for insurance with your agent, the provisos and quid pro quos are the policy limits, deductibles and exclusions.

One very typical exclusion in all commercial insurance policies (and Homeowners policies) is the vacancy exclusion. The simple reason this exclusion exists is that vacant buildings are more prone to arson, theft, vandalism and property damage.

The problem is that while the vacancy exclusion is typical, the commercial insurance definition of “vacant” is atypical. When most of us think of “vacant”, we think of “empty” or devoid of everything and everyone.

In many commercial policies, a building is considered vacant if 31% or more of its total square feet are un-occupied and the operations conducted are not those customary to the use of the building. In such policies, if a building is “vacant” more than sixty days, no coverage will be provided for vandalism, sprinkler leakage, water damage, theft, or attempted theft.
In such policies, it is the definitions within this specialized definition of “vacant” that have proven to be most problematic (at least in the eyes of the insured).

The recent case of Nationwide Mut. Ins. Co v Pinnacle Baking Co., Inc., 2014-Ohio-1257 presents a good example of the issues with vacancy exclusions and their interpretations by Ohio courts.

In Pinnacle, Nationwide insured Pinnacle Baking Co., Inc. through a Business Owners Policy of Insurance. Pinnacle operated a commercial bakery in a building it leased in Columbus, Ohio. Pinnacle ceased business operations in the building in 2008. In 2010, the building was broken into and a freezer, refrigerator, computer, fryer, glazing machine and other equipment was stolen.

In 2011, Pinnacle submitted a proof of loss to Nationwide, claiming $103,000 in stolen goods. Nationwide refused to pay the claim, and Pinnacle sued.  Nationwide asserted that the policy did not cover the 2010 loss, as the property was vacant under the terms of the policy. Pinnacle asserted that the vacancy exclusion in the policy was inapplicable, as Pinnacle kept all of the equipment necessary for a commercial bakery in the building, and "would have been baking again immediately with a quick trip to Kroger for eggs, flour and oil." Nationwide noted that, while Pinnacle had some appliances and equipment in its building, it did not possess the raw materials which were necessary to produce baked goods.

The trial court stated that "[w]hile defendant did not have every item of personal property in the building to conduct customary operations, the policy contains no such requirement” and “Defendant had enough personal property in the building to conduct customary business operations at any time." Accordingly, the trial court determined that the building was not vacant, and Nationwide should pay the claim.

Nationwide asserted on appeal that the trial court erred in finding that the building was not vacant. Nationwide claimed that the building did not contain enough business personal property to engage in customary operations, that the vacancy exclusion to coverage applied, and that Pinnacle was therefore not entitled to coverage under the policy.

The 10th District Court of Appeals recognized that since the facts were not in dispute, the sole issue between the parties was whether or not the Premises were vacant as defined in the insurance policy.

As a guide to define such policy, the court of appeals first summarized the law regarding how insurance contracts are to be construed. “Insurance contracts are construed using the same rules as other written contracts … where the policy’s language is clear and unambiguous, the court may not ‘resort to construction of that languagethe words and phrases used in the policy must be given their natural and commonly accepted meaning… [while] ambiguous provisions—particularly provisions purporting to exclude or limit coverage— must be construed strictly against the insurer and liberally in favor of the insured, the mere absence of a definition in an insurance contract does not make the meaning of the term ambiguous.

Next, the court of appeals examined the specific language of the policy. The vacancy exclusion in the policy provided that, where the "building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs, Nationwide will not pay for loss or damage resulting from vandalism, sprinkler leakage, building glass breakage, water damage, or theft.” The policy further provided that the building would be considered vacant “when it does not contain enough business personal property to conduct customary operations." The policy defined business personal property located in the building as consisting of: “(1) Personal property you own that is used in your business, including but not limited to furniture, fixtures, machinery, equipment, and stock.” “The policy defined "stock" to mean "merchandise held in storage or for sale, raw materials and in-process or finished goods” and "operations" to mean "your business activities occurring at the described premises." The phrase "enough business personal property" was not specifically defined in the policy.

Taking into account the rules of construction and the exact wording of the policy, the court of appeals reasoned that it did not need to determine the meaning of “enough” personal property, because the building did not have a key element of the definition of personal property at the premises: “stock”, to conduct customary operations. The evidence demonstrated that Pinnacle did not have raw materials on site (e.g. eggs, flour, and butter) for it to produce any baked goods.

As such, the court held that “based on the evidence in the record, we are constrained to find that the building was vacant within the terms of the policy.”

What is the moral of this story? Read your insurance policies, and ask your agent to clearly explain all of the provisos and quid pro quos, or your wish for insurance may not come true. Had Pinnacle not vacated its refrigerator, it might have had coverage for its loss.

In addition to understanding how vacancy is defined, the exceptions to the vacancy exclusion must also be clearly understood. In many policies, if a building is under construction or renovation, the building won’t be considered “vacant.” However, in Suder-Benmore Co. Ltd. v. Motorists Mut. Ins. Co., 2013-Ohio-3959 (6th Dist. Ct. of Appeals, Lucas County) the court concluded that planning to renovate did not suffice to meet the definition of renovation. The plaintiff  in Suder-Benmore had begun the process of renovating its space from a party center to a sports bar by hiring an architect, cleaning, hiring a manager for the property, obtaining necessary government approvals, and removing a stage and coat racks. No actual work, however had begun. The court also concluded that the work planned would be considered “remodeling” and not “renovating.”


A Guarantor's Waiver of Defenses Doesn't Protect a Bank From Its Own Misconduct


A recent decision was issued by a California appellate court that, while not controlling in the State of Ohio, is worth mentioning as it could prove useful to guarantors in other jurisdictions in similar straits. In California Bank & Trust v Thomas Del Ponti, the trial and appellate courts refused to deem the waiver of statutory defenses that are typical in loan and guaranty agreements as waiving ALL defenses, particularly equitable defenses, if the result of enforcing the guarantee would be the unjust enrichment of the bank.
The above case involved a construction loan by California Bank & Trust’s predecessor-in-interest, Vineyard Bank. The loan was for the construction of townhome project in two phases, and was guaranteed by two principals of the developer.  About the time the first phase was nearly complete, the bank stopped funding the construction draws, which prevented the construction on the first phase from being completed, and obviously resulted in a developer default under the loan.
The bank eventually reached a deal with the developer and required the general contractor to complete phase one so it could sell completed townhome units at auction. However, the bank wanted the subcontractors to take a haircut on their invoices and release their mechanics liens. The general contractor instead paid the subcontractors out of its own funds so the units could proceed to auction lien-free. Despite all of this, the bank proceeded to foreclose on the developer and sold the units through a trustee sale. It then sued both the developer and guarantors through California Bank & Trust, as its assignee, to seek payment on the deficiency balance. The general contractor joined the fun and sued both the bank and the developer due to breach of contract and seeing restitution the losses it suffered.
The court consolidated the bank and contractor cases and found against the bank on both holding that the bank breached the assigned construction contract AND breached the loan agreement with the developer, absolving the guarantors of liability.
The bank appealed claiming that the guarantors’ waived of all of their defenses in the guaranty agreements. The appellate court disagreed. The guaranty agreements did not expressly waive the bank’s own misconduct and the court was not about to read that into the agreement.  The court held that to enforce such a sweeping interpretation would violate public policy as it would result in the guarantors’ being forced to pay the deficiency balance on the note to the bank when it was the bank who willfully breached the loan agreement causing the default.
This action would likely play out the same way in most courts in Ohio or elsewhere in the Midwest. The courts expect all parties in a transaction to act in good faith, and absent an express language the states otherwise, typically won’t stand for a party to be unjustly enriched by its own misconduct.
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