The Use of Arbitration in Ohio

For a number of years, arbitration was used primarily in commercial trade disputes, and later in labor and trade union disputes. More recently, however, arbitration clauses have made their way into ordinary consumer contracts and transactions, oftentimes vis-a-vis fine print contained in consumer loans, insurance policies, and garden variety purchase agreements. Today, arbitration clauses are now being used in credit card transactions. What is little known by many is that the use of arbitration in Ohio results from provision in Ohio law that must be complied with in order to benefit from arbitration provisions in contracts.

Arbitration in Ohio is governed by Title 2711 of the Ohio Revised Code. Initially, the law states, “A provision in any written contract...to settle by arbitration...shall be valid, irrevocable, and enforceable, except upon grounds that exist at law or in equity for the revocation of any contract (ORC 2711.01(A)). The exceptions to this statute relate to certain real estate issues.

Any party can seek a stay of any legal proceeding if a valid arbitration provision is contained in the contract (ORC 2711.02). The succeeding party may petition the court to enforce the arbitration reward within one year (ORC 2711.09). When a motion is made.. to confirm an arbitration award, a court must grant the motion unless a timely motion for modification or vacation has been made and cause to modify or vacate is shown. Absent such a challenge to the arbitration award, the court does not have discretion under § 2711.09 to deny the application to confirm the award, MBNA Am. Bank, N.A. v. O'Brien, 168 Ohio App. 3d 137.

Any application to enforce an arbitration award must contain the following:

1. The agreement, the selection or appointment, if any, of an additional arbitrator or umpire, and each written extension of the time within which to make the award;

2. The award;

3. Each notice, affidavit, or other paper used upon an application to confirm, modify, or correct the award, and a copy of each order of the court upon such an application

There are rare instances when a court will not enforce an arbitration provision. To avoid controversy, many courts demand that such provisions comply with standard American Arbitration Association clauses such as the following :

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.”

The reader is cautioned that additional arbitration provisions apply in medical disputes.

When is an Attorney in Conflict of Interest

Many times client ask an attorney or his firm to represent them in a legal dispute bewteen fellow shareholders or partners where the attorney or firm had rendered legal representation in the past.

While the general ethical rule states that an attorney may not represent a party if there the possibility of a conflict of interest, the issue is a bit more complicated. The complication arises in defining the term “conflict of interest.”

Ohio has adopted the three-part test for disqualification of counsel due to a conflict of interest set forth in Dana Corp. v. Blue Cross & Blue Shield Mut. Of N. Ohio., (C.A.6, 1990), 900 F.2d 882. Also see Morgan v. N. Coast Cable Co. (1992), 63 Ohio St.3d 156, 586 N.E.2d 88; Hollis v. Hollis (1997), 124 Ohio App.3d 481, 485, 706 N.E.2d 798; Kitts v. U.S. Health Corp. of S. Ohio (1994), 97 Ohio App.3d 271, 275, 646 N.E.2d 555. The test is as follows:

(1) a past attorney-client relationship must have existed between the party seeking disqualification and the attorney he or she wishes to disqualify;

(2) the subject matter of the past relationship must have been substantially related to the present case; and

(3) the attorney must have acquired confidential information from the party seeking disqualification.

In determining whether corporate counsel should be disqualified from representing any of the corporation's officers in a later suit, the trial court is required to find all three factors enumerated in the Dana test before ordering disqualification, Legal Aid Soc. of Cleveland v. W & D Partners I, L.L.C., 162 Ohio App.3d 682, 2005 Ohio 4130, 834 N.E.2d 850.

Even though an attorney has served as counsel for a corporation, Ohio does not require the immediate disqualification of the attorney from serving as personal counsel for a shareholder or officer in a suit involving the corporation, Phillips v. Haidet (1997), 119 Ohio App.3d 322, 325, 695 N.E.2d 292; A.G. Financial, Inc. v. LaSalla, Cuyahoga App. No. 84880, 2005 Ohio 1504; Maloof v. Benesch, Friedlander, Coplan & Aronoff, Cuyahoga App. No. 84006, 2004 Ohio 6285.

In Ohio, pursuant to Rule 1.13(a) of the Ohio Rules of Professional Conduct, corporate counsel represents the interests of the corporation and not those of individual officers:

"(a) A lawyer employed or retained by an organization represents the organization acting through its constituents. A lawyer employed or retained by an organization owes allegiance to the organization and not to any constituent or other person connected with the organization. The constituents of an organization include its owners and its duly authorized officers, directors, trustees, and employees."

Therefore, in order for there to be a conflict of interest the following must be proven:

1. There was a past attorney-client relationship between the lawyer and the individual. Just because an attorney represented the corporation, that does not assume he presented the individual shareholders or partners too. Even if the attorney met with the members of a closely held corporation to discuss corporate business does not, in and of itself, arise to an attorney-client relationship with the individual shareholder or partner, and

2. Even if there was an attorney-client relationship, the subject matter of that relationship must be related to the present case for which the attorney is being retained, and

3. The attorney must have acquired confidential information from the party.

Note, all three of these requirements must be met before the conflict will arise. They are not mutually exclusive but a three-part requisite.

The “Statutes of Limitation”

From time to time, I receive telephone calls from clients who want to know how long they have to take action against someone. Ohio, as do all states, set time limitations by which you must file legal action. This is known in legal jargon as the “Statute of Limitations.” While this term is somewhat descriptive, it fails to completely describe some of the dates of which you should be aware. The Ohio Revised Code provide a series of statutes for this purpose. There are some dates set forth by which you must file an action. There are other dates that are dates of expiration. Allow me to explain.

Statute of Limitations

The State of Ohio sets, by statute, time limits by which you must file an action. Failure to file by that time nullifies any action. Some of the important dates are:

• Injury to person - If you or your employee is hurt in some type of accident (other than those injuries covered by statute such as injuries on the job) you have two years from the time you incurred the injury or discovered the injury. For example, if you are injured in an automobile accident, you have two years to file an action.

• Professional Malpractice - If you were injured as a result of negligence by a professional, you have one year from the time or the injury or when you discovered the injury to file an action. Giving a medical professional the appropriate notice can extend the time limit by 180 days in certain circumstances. If, for example, you incur bodily injury due to a doctor’s negligence and do not discover that injury for some time, you, generally, have one year from the date you discovered that injury to file an action.

• Contracts - If the contract is in writing, you have 15 years to file an action for breach of contract. If the contract was not in writing (known as an “oral contract”), you have only 6 years. Remember my adage - Always get it in writing!

• Collection on Account - If you keep running accounts, you have 6 years to file an action. You will note this is the same as your time limit for an oral contract. Therefore, it is important to obtain a written contract setting balance limits, guarantees or other issues relating to the sales of goods and/or services.

• Dishonored checks and drafts - There is a three year limitation. Note, this does not apply to the bank where you presented the check or the bank upon which the check was drawn. The bank’s liability is set forth by separate statute that outlines limitations on their liability.

• Judgments - Judgments are valid for 21 years.

• Embezzled funds - Although any resolution of criminal action may require reimbursement, the civil limitation is one year.

Federal statutes also contain limitations relating to issues involving federal projects, jobs and other issues.

Time Limits

While not exactly statutes of limitation, Ohio and the US Government do put limitations on the enforcement of certain liens and judgment.

• Mortgages - A mortgage that has not been released but has been of record for 21 years past it due date is deemed to be of no effect.

• Mechanic’s Lien - This type of lien is valid for 6 years. The lien is not renewable. Therefore, you must take action to foreclose within 6 years or lose your rights related to that realty.

• Judgment Liens - A judgement lien must be renewed every 5 years. This lien will only be enforceable as long as the judgment is in force. Note, although a judgment is valid for 21 years, a lien recorded pursuant to that judgment must be renewed every 5 years.

• Federal Tax Liens - This type of lien must be renewed every 10 years. Note, this type of lien attaches to after acquired property. A federal tax lien runs with the person, not the land. Therefore, if a federal tax lien is placed upon you and you subsequently purchase realty, that lien attaches to the newly acquired property.

• Federal Judgment Lien - This lien is effective for 20 years and is renewable.

• Ohio State Liens - This type of lien is valid for 15 years and is renewable if the renewal is filed within 6 months of the expiration of the lien.

• Condominium Lien - Liens by condominium association for CAM or other charges are valid for 5 years unless renewed prior to expiration.

• Child Support Lien - Liens upon property resulting from support issues have no expiration date and attach to after acquired property.

• UCC Financing Statements - Also known as “chattel mortgages,” these are valid for 5 years unless renewed prior to expiration or the term of the mortgage if filed as security along with the mortgage.

Also note that dower rights (rights of a spouse relating to property owned by the other spouse) attach to all property owned by a husband or wife. Also be aware that various state and federal laws may alter these date limitations in specific instances such as workers compensation, subcontractor rights on federal projects, etc.

Restrictive Covenants in Employment Contracts

A recent Ohio case brought to mind the ever changing status of covenants not to compete. The case, Murray v. Accounting Center & Tax Services, Inc., while not the most controversial or ground breaking case, does evoke thought regarding the tentative nature of covenants not to compete in employment contracts.

Murray v. Accounting Center & Tax Services, Inc.

The case involves an accountant who was employed by the bookkeeping service. She had signed a covenant not to compete for a period of two years after her termination. Other facts pertinent to the case were that: 1) She was a bookkeeper and had a private practice providing tax return services prior to her employment, and 2) the agreement was signed AFTER she was employed.

Consideration

Historically, Ohio courts were resolute that any covenant not to compete had to include additional consideration (usually an increase in pay or bonus) if the covenant was entered into after employment began. If an employer demanded an employee sign such an agreement after their employment began and additional monies or other consideration was not paid, the covenant was unenforceable.

In the last few years this principle has eroded and several courts in Ohio have abandoned this theory of law. The Eighth Appellate District (Cuyahoga County) has completely reversed this historical precedent by stating that continued employment is sufficient consideration for such a covenant. Many other courts have follows this ruling and, today, the courts of Ohio are split regarding this issue. The Ohio Supreme Court has yet to rule on this legal conflict.

Modification by Court Order

The other issue this case presents is the power of the court to limit the restrictions of such covenants. Typically, restrictive covenants set forth limitations as to time and distance. Such restrictions are characterized by such terms as ..”for a period of two years and 500 miles.” This meant the employee could not work in the same field for two years within 500 miles of the employer’s address.

Once again, historically, the courts are allowed to reduce these limitations if they are too restrictive. In the Murphy case, the court stated,

“ A covenant restraining an employee from competing with his former employer upon termination of employment is reasonable if the restraint is no greater than is required for the protection of the employer, does not impose undue hardship on the employee and is not injurious to the public.”

If the covenant not to compete is unreasonable, courts are empowered to modify the terms of the covenant to create reasonable constraints. Some the factors taken into consideration are:

1. Absence or presence of limitations as to time and space.

2. Whether the employee represents the sole contact with the customer.

3. Whether the employee is possessed of confidential information or trade secrets.

4. Whether the covenant seeks to eliminate competition which would be unfair to the employer or merely seeks to eliminate ordinary competition.

5. Whether the covenant seeks to stifle the inherent skill and experience of the employee.

6. Whether the benefit to the employer is disproportionate to the detriment of the employee.

7. Whether the covenant operates as a bar to the employee’s sole means of support.

8. Whether the employee’s talent was developed during the employee’s term of employment.

9. Whether the forbidden employment is merely incidental to the main employment.

For example, lets assume the covenant read,...”shall not be employed as an accountant for a period of two years within 500 miles...” This covenant would obviously be subject to modification. It bars the employee from obtaining any employment in their chosen profession. The benefit to the employer far outweighs the detriment to the employee and, finally, it operates to bar the employee’s sole means of support.

Now, let’s modify the covenant to read, “...shall not be employed as an accountant for a bookkeeping service to widget manufacturers for a period of two years within 50 miles...” The difference is obvious. The covenant does not totally restrict the employee from obtaining employment in their profession and the restriction appears only to protect the vertical market serviced by the employer. In this instance the court might maintain the covenant as is.

Conclusion

Nonetheless, the employer should be mindful of the fluidity of these type of restrictions. They should be aware of where they are located and determine whether the court in their jurisdiction will enforce the covenant and/or modify it. It requires the employer to be somewhat creative in the way the covenant is written. Most importantly it requires the employer to be aware that courts, generally, will side with the employee when the court feels the employer is treating its employee unfairly.

The Case for Putting it in Writing

In prior blogs, I’ve emphasized the need to get any agreement in writing. A recent court of appeals case, shows what happens when you reply on oral agreements.

The case, Catz Enters. v. Valdes, 2009 Ohio 4962, involved two checks given by one party to the other totaling $20,000. The checks were written on July 8, 1991. As alleged by the creditor, the payments were a loan to the debtors. He continued to demand payment, writing several letters to the debtors demanding payment through April 7, 2006 when the he finally filed suit. The creditor claimed there was an oral agreement calling for the debtors to repay the loan by September 6, 1991. He further alleged that the statute of limitations for filing suit was extended by his oral and written demands for payment. The debtors denied there was a loan.

Written in Ohio statutes are various “statutes of limitation” setting forth the time by which a party must take action against another for any alleged wrongdoing. For example, an action based on negligence (a car accident, for example) must be filed within two years. In the case of contracts, the statute of limitations on a written contract is 15 years. The statute of limitations on an oral contract is 6 years.

As stated by the court, “the statute of limitations on oral contracts is six years and ...The six year statute of limitations may be extended [only] if there is a writing, signed by the charged party, acknowledging the debt or promising to pay it, O.R.C. 2305.08.”

Since the creditor could produce no written document signed by the debtors acknowledging the debt or extending the terms of the agreement, the statute of limitations ran on September 6, 1997 (6 years from the date the loan was allegedly due). Therefore, the creditor could not enforce the debt because the statute of limitation had run.

So, we have a prime example of the consequences in relying upon an oral agreement. What is also apparent is the fact that the debtors denied there was even a loan. Therefore, the terms of the alleged agreement were even in controversy. Had the creditor obtained a document, signed by the debtors acknowledging the loan, the outcome may have been different.

The obvious – get any agreement in writing, signed by both parties.

Let the Sub-Contractor Beware

A recent decision of Franklin County Court of Appeals (10th District) should give sub-contractors fair warning that giving estimates without proper restrictions could result in general contractor’s making use of the sub’s time and energy without compensation.

In the case of Complete General Construction Co. v. Kard Welding, Inc., 182 Ohio App.3d 119, Complete submitted an estimate to Kard for supplying steel highway ramp components. Kard used these estimates when it submitted its bid to the Ohio Department of Transportation. Kard won the bid, but used another supplier to supply the components.

In trial Complete argued that by using the estimate, Kard is estopped from using another supplier and the court should impose a contract upon Kard and award damages to Complete for breach of contract. The trial court ruled in favor of Kard saying there was no contract and, therefore, no breach. The evidence presented at the time of trial included testimony that certain terms of Complete’s bid were not acceptable and the covenants required by Complete were subject to renegotiation. Consequently, the court found that there was no acceptance of the offer by Kard.

Complete appealed the court’s decision and the appellate court sustained the lower court’s findings. In summary, the court stated:

“A subcontractor who makes a "bid" or "quote" which constitutes an offer to a general contractor, who submits a bid in reliance upon such offer, is bound to perform in accordance with the terms of that offer when the general contractor (1) is awarded the contract and (2) within a reasonable time thereafter notifies the subcontractor that the offer is accepted. Under such circumstances the subcontractor is liable in damages to the general contractor for failure to perform.”

“A general contractor's mere use of a subcontractor's quote in formulating a bid for a general contract does not constitute acceptance of the subcontractor's offer.”

Apparently, the court was looking for some memorandum or other documentation between the parties implying an acceptance of the offer by Kard given the disputed terms. The court obviously concluded that an element of contract was not met - a meeting of the minds - and, therefore, there could be no breach from which damages would arise.

The jurisdiction of this court of appeals is only Franklin County (Columbus area) but I would warn those reading this blog that the 10th Appellate Court is very influential and other courts tend to follow their opinions.

So what does one do to protect its work product? First, know whom you are dealing with. If this is the first time you are submitting a bid seek out the contractor’s reputation for “bid-shopping.” Second, work with your attorney to determine language in the bid that protects you from this type of contractor. Finally, be sure you have, in writing from the contractor, some memorandum of understanding that in the event its bid is accepted using your estimate, that your estimate is deemed a consummated contract for the purpose of performing the work or supplying the material set forth in your estimate.

Contracts and Equitable Relief

How to you solve the issue of payment when you can’t prove you have an express contract? If you’ve read this blog, you know I stress to my clients the necessity to enter into WRITTEN contracts. But for those who still rely on the “handshake” take heart. The courts do permit relief.

A typical example of this issue was discussed in the recent case of Bldg. Industry Consultants v. 3M Parkway, 182 Ohio App.3d 39, arising from the Ninth Appellate District of Ohio (Lorain). In that case the parties never entered into a formal contract. There were communications, letters and memorandums exchanged, the plaintiff did perform some services, but the parties never formally agreed on a price or for that matter an agreement outlining the contractual obligations of each party. As the court stated, the elements of a formal express contract were not present - “...offer, acceptance, contractual capacity, consideration, a manifestation of mutual assent and legality of object and consideration.”

The court went on to say, “To constitute a valid contract, both parties to a contract must assent to its terms; there must be a meeting of the minds of the parties with respect to the essential terms of the contract, which terms are also definite and certain.”

Even though there is no express contract, a court does have the power to compensate an aggrieved party under the theories of “unjust enrichment” or “quantum meruit.” In other words, the court can impose an implied or constructive contract using these theories of equitable relief. As is obvious from the term, “equitable relief” is available if it is proven that a party obtains a unjust benefit through another’s actions.

To be success ful, the aggrieved party must prove that: “... (1) a benefit has been conferred by a plaintiff upon a defendant, (2) the defendant had knowledge of the benefit, and (3) the defendant retained the benefit under circumstances where it would be unjust to do so without payment,” Bldg. Industry Consultants, v. 3M Parkway, Supra.

So even though parties do not enter into a formal written contract, given the proper evidence, a court will award payment. In this case the court did award the plaintiff payment for work the plaintiff did perform in furtherance of the project notwithstanding the fact that the plaintiff was unable to prove a formal express contract.

The Use of Cognovit Notes in Ohio

Historically, the use of cognovit notes was prevalent in Ohio. The use of this type of promissory note allowed the creditor to obtain a judgment against the debtor without the need to file legal proceedings. Based upon the terms of such a note, the creditor merely obtained the signature of any attorney who confessed judgment against the debtor for the amount owed - no lawsuit, no court proceedings and no need for presentation of evidence.

Identifying the perceived dangers in such a note, the legislature passed O.R.C. 2323.13. Entitled “Warrant of attorney to confess,” the statute sets forth certain restrictions in the use of a cognovit note.

First and foremost, a cognovit note can not be used for any transaction arising out of a “consumer loan” or “consumer transaction.” These terms are defined in the code as follows:

“(1) Consumer loan means a loan to a natural person and the debt incurred is primarily for a personal, family, educational, or household purpose. The term "consumer loan" includes the creation of debt by the lender's payment of or agreement to pay money to the debtor or to a third party for the account of the debtor; the creation of a debt by a credit to an account with the lender upon which the debtor is entitled to draw; and the forbearance of debt arising from a consumer loan.”

“(2) Consumer transaction means a sale, lease, assignment, award by chance, or other transfer of an item of goods, a service, franchise, or an intangible, to an individual for purposes that are primarily personal, family, educational, or household.”

Additionally, any note containing a confession of judgment feature (a cognovit note) must contain the following verbiage:

"Warning -- By signing this paper you give up your right to notice and court trial. If you do not pay on time a court judgment may be taken against you without your prior knowledge and the powers of a court can be used to collect from you regardless of any claims you may have against the creditor whether for returned goods, faulty goods, failure on his part to comply with the agreement, or any other cause."

This language must be in “...such type size or distinctive marking that it appears more clearly and conspicuously than anything else on the document...”

Case law has also restricted the use of cognovit notes. In a recent Pickway County case, Onda v. Johnson, 2009 Ohio 4727, the court found that the use of a cognovit note will be strictly construed not only as to the requirements of ORC 2323.13 but as to the provisions on Ohio’s Uniform Commercial Code, ORC 1301.01 et seq. The court wrote, “...[if] the cognovit note is facially insufficient, the trial court lacked subject matter jurisdiction and its judgment on the note is void ab inito.” In other words, if the terms of the note fail to meet the requirements of a promissory note as required by 1301.01, et seq., the note will be void.

While, cognovit notes are still valid for commercial transactions, it is incumbent upon the maker of the note to ensure that the note strictly complies with the edicts of ORC 2323.13 and 1301.01, et seq.

Is a Spouse Liable for the Debts of the Other Spouse?

In “Contracts 101" all law students are taught that a spouse can be held liable for the “necessities” of the other spouse. This tenant has been promulgated in Ohio in O.R.C. 3103.03. The statute states in part:

“(A) Each married person must support the person's self and spouse out of the person's property or by the person's labor. If a married person is unable to do so, the spouse of the married person must assist in the support so far as the spouse is able...

"If a married person neglects to support the person's spouse in accordance with this section, any other person, in good faith, may supply the spouse with necessaries for the support of the spouse and recover the reasonable value of the necessaries supplied from the married person who neglected to support the spouse unless the spouse abandons that person without cause.”

Historically, “necessities” have included medical care, sustenance, and housing. In the event a spouse fails to provide these necessities, the spouse or a third party may take action against the non-supporting spouse to pay for these necessities.

But what happens when the spouse is able, but fails, to pay? A recent of Ohio case, Brown v. Williamson, 2009 Ohio 4579, took up this issue. In this case, the husband failed to pay rent and the landlord sued both spouses for the back rent even though the wife did not sign the lease. The lower court found in favor of the landlord stating, in fact, the wife is liable for necessitates, which includes housing.

The appellate court disagreed, in part. The court, citing Ohio State Univ. Med. Center v. Calovini, 2002 Ohio 5756,, in part, stated, “...we agree with the trial court that housing, like medical care, qualifies as a ‘necessary’ and is a component of a spouse's support obligation under R.C. § 3103.03. But even if the statute is applicable here, [the wife is not liable] for her husband's rent obligation unless he is unable to pay the debt and she is able to aid in his support by paying it herself...”

Therefore, the court set forth the following criteria before a spouse can held liable for the debt of their spouse:

1. The debt must be for a “necessity, i.e. medical, food or housing, etc.

2. The spouse must be unable to pay for the necessity themselves, and

3. The spouse has the ability to aid in that support obligation.

As a result, it appears any creditor must exhaust all efforts against one spouse before pursuing the other spouse. And, in pursuing the other spouse, the creditor must show the other spouse has the financial means to pay the obligation.

Motion for Relief from Judgment

You discover that a judgment was erroneously taken against you. What do you do? Courts will permit a party to seek relief from a judgment taken against them if certain criteria are met. Under Rule 60 of the Ohio Rules of Civil Procedure (a set of rules that all courts and lawyers must follow to pursue or in relief from a legal claim) sets forth the rules by which a party may seek to reopen a lawsuit. While Rule 60 is a rather small bit of judicial legislation, consisting of a mere two paragraphs, it has sired a huge amount of litigation.

Rule 60 is divided into two parts. The first, subsection A, relates to “clerical errors” by the court. Basically, if there is an error or omission in an entry by the court the party or the court, on its own motion, may seek to correct that error.

Subsection B, relating to non-court errors has grown to be the most controversial. That section, known as Rule 60(B) states:

“On motion and upon such terms as are just, the court may relieve a party or his legal representative from a final judgment, order or proceeding for the following reasons: (1) mistake, inadvertence, surprise or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(B); (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation or other misconduct of an adverse party; (4) the judgment has been satisfied, released or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (5) any other reason justifying relief from the judgment. The motion shall be made within a reasonable time, and for reasons (1), (2) and (3) not more than one year after the judgment, order or proceeding was entered or taken. A motion under this subdivision (B) does not affect the finality of a judgment or suspend its operation.”

In summary, a party make seek relief from judgment for the following reasons:

1. Mistake, inadvertence, surprise or excusable neglect.

2. Newly discovered evidence

3. Fraud, misrepresentation or other misconduct by the other party

4. The judgment was satisfied, released or discharged, or

5. Any other reason justifying relief

It would appear that it might be easy to obtain relief. But, this is not true. Pursuant to the landmark case of GTE Automatic Elec., Inc. v. ARC Industries, Inc., 47 Ohio St.2d 146, any party seeking relief from judgment must demonstrate that.

1. The party has a meritorious defense or claim to present if relief is granted,

2. The party is entitled to relief under one of the grounds stated in Civ.R. 60(B), and

3. The motion is made within a reasonable time.

If any of these issues are not demonstrated bythe party, relief will be denied.

Now, you say, that’s easy, I just say I don’t owe it, cite one of the grounds and file it within one year. Not so easy. First, the party must set forth articuable facts to support its “meritorious defense.” A self serving statement that the party does not owe the debt is insufficient. Further, the party must set forth articuable facts to support its grounds for relief. Just a general statement that the judgment was obtained “through fraud” is insufficient. The party must set forth the alleged fraudulent acts of the other party. Finally, the motion must be filed within a “reasonable time.” The party can not sit on their rights. Many courts have denied motions for relief even when the party has filed its motion well within the one years requirement. For example, assuming you learn of this judgment immediately after it is rendered and wait months before filing, many courts have denied the party’s motion as being “not timely filed.”

If the motion survives a preliminary review by the court (after reading the other party’s memorandum in opposition to your motion), the court will schedule a hearing that will require you, the moving party, to demonstrate the merits of your motion. If the court finds you failed to sustain the burden, it can deny your motion.

So, if you find yourself in such a predicament, what should you do? First, you must seek redress with the court immediately. A delay could prove fatal to your motion. Second, if you do file such a motion, you must articulate, in detail, the reasons you seek relief being sure to follow the requirements of GTE Automatic Elec., Inc. v. ARC Industries, Inc, Supra. Third, and most importantly, I strongly suggest you seek benefit of counsel. Rule 60(B) has become a highly litigated section of the Ohio Rules of Civil Procedure. Due to the litiginous nature of this section, it has produced an unusually high number of cited cases that have continued to refine and delineate different case scenarios that are difficult for any layman to research and address.

Piercing the “Corporate Veil”

Under normal circumstances the corporation can insulate its shareholders and inside employees from personal liability. In fact, historically, the primary reason for incorporating a business is to prevent a creditor from attaching the personal assets of the individual shareholders. If the corporation is maintained and run as a separate entity, properly funded and avoids paying personal liabilities of its shareholders, this “Vail” can not be broken.

But if a court finds that the corporation was formed merely to shield its shareholders from their unlawful acts, then the court can order personal liability of the shareholders. In the landmark case of Belvedere Condominium Unit Owners' Ass'n v. R.E. Roark Cos., (1993) 67 Ohio St. 3d 274, The Supreme Court of Ohio promulgated criteria to justify the piercing of the corporate veil that would allow creditors to obtain personal liability of the shareholder.

In its synopsis the court stated:

“A fundamental rule of corporate law is that, normally, shareholders, officers, and directors are not liable for the debts of the corporation. An exception to this rule was developed in equity to protect creditors of a corporation from shareholders who use the corporate entity for criminal or fraudulent purposes. Under this exception, the veil of the corporation can be pierced and individual shareholders held liable for corporate misdeeds when it would be unjust to allow the shareholders to hide behind the fiction of the corporate entity. Courts will permit individual shareholder liability only if the shareholder is indistinguishable from or the alter ego of the corporation itself.

In defining its exception, the court went on to say:

“The corporate form may be disregarded and individual shareholders held liable for corporate misdeeds when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised 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.”

Over the years, these three criteria were refined to allow piercing of the corporate veil under various circumstances including, payment of personal expenses from corporate funds, undercapitalizing the corporation, using the corporation to shield the individual shareholder from statutory violations such as building code violations, banking laws, and financing law violations.

In reading the criteria, it appears that the criteria is quite burdensome. But recent court cases have eased what appears to be a draconian reading of these rules. In Dombroski v. WellPoint, Inc., 119 Ohio St.3d 506, 2008 Ohio 4827, the Ohio Supreme Court lessened the burden to litigants as it pertains to the second prong of the test, “...as to commit fraud or an illegal act against the person seeking to disregard the corporate entity.”

In its opinion the court expanded this criteria to include “...similarly unlawful act[s].” Of course, the court failed to define this term. Therefore, many courts sought to determine the court’s meaning. Many courts have attempted to define this verbiage using the Supreme Court’s statement that "[c]ourts should apply this limited expansion cautiously toward the goal of piercing the corporate veil only in instances of extreme shareholder misconduct."

A 2009 case in the Fourth Appellate District (Jackson County, Ohio) is typical of this attempt at interpretative jurisprudence. The case, Stewart v. R.A. Eberts Co., 2009 Ohio 4418, involved the purchase of a coal mine. As part of the agreement, the Plaintiff was to receive royalties of $1.00 per ton of coal. The Plaintiff attempted to obtain personal liability of the shareholders and directors. Apparently, the corporate entity that was to pay the plaintiff was unable to do so.

The Plaintiff argued that the second criteria was too restrictive; that the Supreme Court’s second criteria included "unjust or inequitable conduct.” The court rejected the Plaintiff’s argument citing the Dombroski case stating that the Plaintiff's interpretation was too liberal; that "unjust or inequitable conduct” did not rise to the level of "fraud, an illegal act, or a similarly unlawful act."

So what do we conclude from these cases:

1. That courts are still in flux regarding the interpretation of the criteria to pierce the corporate veil, and

2. That courts look to the actions of the insiders to interpret the three criteria, and

3. The actions of the insider must be unlawful, not just unjust or inequitable, i.e. fraudulent conveyance of assets, conversion of assets, etc., and

4. The interpretation of the jurisprudence set forth in Belvedere must be done on a case by case basis to determine whether the facts in that particular case meet the criteria to pierce the corporate veil.

It's time again for the annual "Stella Awards!"

To prove this blog does have a sense of humor, I pass along an article sent me by one of the followers of this blog. It is a copy of the annual Stella Awards. I make no representations regarding the truth of these lawsuits.

According to the reader, they are named after 81-year-old Stella Liebeck who spilled hot coffee on herself and successfully sued the McDonald's in New Mexico , where she purchased coffee. You remember, she took the lid off the coffee and put it between her knees while she was driving. Who would ever think one could get burned doing that, right? These are awards for the most outlandish lawsuits and verdicts in the U.S. Here are the Stellas for the past year - Enjoy:

SEVENTH PLACE - Kathleen Robertson of Austin, Texas was awarded $80,000 by a jury of her peers after breaking her ankle tripping over a toddler who was running inside a furniture store. The store owners were understandably surprised by the verdict, considering the running toddler was her own son.

SIXTH PLACE - Carl Truman, 19, of Los Angeles , California won $74,000 plus medical expenses when his neighbor ran over his hand with a Honda Accord. Truman apparently didn't notice there was someone at the wheel of the car when he was trying to steal his neighbor's hubcaps.

FIFTH PLACE - Terrence Dickson, of Bristol , Pennsylvania , who was leaving a house he had just burglarized by way of the garage. Unfortunately for Dickson, the automatic garage door opener malfunctioned and he could not get the garage door to open. Worse, he couldn't re-enter the house because the door connecting the garage to the house locked when Dickson pulled it shut.. Forced to sit for eight, count 'em, EIGHT days and survive on a case of Pepsi and a large bag of dry dog food, he sued the homeowner's insurance company claiming undue mental anguish. Amazingly, the jury said the insurance company must pay Dickson $500,000 for his anguish.

FOURTH PLACE - Jerry Williams, of Little Rock, Arkansas, garnered 4th Place in the Stella's when he was awarded $14,500 plus medical expenses after being bitten on the butt by his next door neighbor's beagle - even though the beagle was on a chain in its owner's fenced yard. Williams did not get as much as he asked for because the jury believed the beagle might have been provoked at the time of the butt bite because Williams had climbed over the fence into the yard and repeatedly shot the dog with a pellet gun.

THIRD PLACE - Amber Carson of Lancaster, Pennsylvania because a jury ordered a Philadelphia restaurant to pay her $113,500 after she slipped on a spilled soft drink and broke her tailbone. The reason the soft drink was on the floor: Ms. Carson had thrown it at her boyfriend 30 seconds earlier during an argument.

SECOND PLACE - Kara Walton, of Claymont , Delaware sued the owner of a night club in a nearby city because she fell from the bathroom window to the floor, knocking out her two front teeth. Even though Ms. Walton was trying to sneak through the ladies room window to avoid paying the $3.50 cover charge, the jury said the night club had to pay her $12,000....oh, yeah, plus dental expenses.

FIRST PLACE - This year's runaway First Place Stella Award winner was: Mrs. Merv Grazinski, of Oklahoma City, Oklahoma, who purchased a new 32-foot Winnebago motor home. On her first trip home, from an OU football game, having driven on to the freeway, she set the cruise control at 70 mph and calmly left the driver's seat to go to the back of the Winnebago to make herself a sandwich. Not surprisingly, the motor home left the freeway, crashed and overturned. Also not surprisingly, Mrs. Grazinski sued Winnebago for not putting in the owner's manual that she couldn't actually leave the driver's seat while the cruise control was set.. The Oklahoma jury awarded her, are you sitting down? $1,750,000 PLUS a new motor home. Winnebago actually changed their manuals as a result of this suit, just in case Mrs. Grazinski has any relatives who might also buy a motor home.

Put It in Writing

In former blogs, I’ve discussed contracts and their enforceability. Many of my clients - especially those in the construction and retail business - have asked me why I insist they get a written memorandum of their agreement with their customer. Allow me to elaborate:

1. Defining the terms of the agreement. Placing an agreement in writing sets down, in black and white, each party’s agreement. Oral contracts are open to each party’s interpretation of the terms of the agreement and result in misunderstanding and often litigation.

A prime example of this type of issue is the so-called “Change Order.” This type of contract is normally used in the construction industry to identify a change in the terms of the original contract. Some change orders merely identify changes in specifications having no impact on the cost of construction. Other change orders may have an impact on the cost of construction or identifies additional work to be performed. Placing the change in writing avoids the conflict in the interpretation of the change order, sets forth the terms of the change order, identifies the type of change order and any additional costs to be paid.

2. Avoiding statutory violations. Many state and federal statutes require certain terminology to be placed in a contract. Consumer protection laws and Regulation Z are typical examples. Home solicitation sales require specific language regarding a consumer’s right to cancel a contract. Regulation Z requires an entire form be completed outlining a debtors payments and the calculation of interest. Failure to include this language in a contract can have enormous consequences by way of fines, attorney fees, statutory penalties and, in some instances, criminal prosecution.

3. Warranties - In selling goods and services certain warranties are implied by law. For example, it is implied in law that a mechanic warrants that he repaired a vehicle properly. Other implied warranties are so called “merchantability” warranties - warranties that ensure that the product or service being sold can be used properly. Another warranty is the warranty that the product is fit for a particular purpose - that the merchant knew the particular use for which the product was being purchased and warrants that the product will perform that application. In real estate there are warranties relating to title and merchantability. If not specifically limited in writing, expensive litigation could ensue interpreting these warranties.

4. Avoiding protracted litigation. Oral contracts are notoriously troubling because the terms of the agreement are open to interpretation. Placing an agreement in writing avoids what is called “parole evidence” - the introduction of representations made outside the contract. Placing an agreement in writing sets forth all the terms of the contract and avoids the issue of your customer claiming something that is not in the written agreement

I’ll never forget the day I attended a local chamber of commerce luncheon. Seated at my table was a contractor. We entered into a conversion regarding a major issue he was having with his original contractor over the terms of a contract. He claimed he did the work and then, at the contractor’s request, performed additional work. He billed for this work and the contractor refused to pay him. Why? Because the contractor claimed this additional work was performed to correct problems under the original contract. I asked him if this additional work was agreed to in writing. His answer was no. I asked him why. He stated he was already on the job and didn’t think that he needed to take the time and besides, “[he] didn’t want to get the contractor angry and wanted to avoid a headache.” Well, he exchanged one headache for another.

Ohio’s Mechanic’s Lien Law - Home Construction or Purchase Contracts

In prior blogs I’ve discussed Ohio Mechanic’s Lien law and its impact on Private Improvements and Public Improvements (See blogs of July 17, 2009). In my discussion of Private Improvements I told you improvements made to private homes are treated differently than the standard “commercial” improvement. The purpose of this blog is to discuss home construction or purchase contracts and the differences between them and the standard private improvement.

Ohio Revised Code 1311.011 protects the owner of a private residence against paying more than originally contracted. If the owner can prove he has paid the original contractor 100% of the contract price PRIOR TO the receipt of the affidavit to obtain a mechanic’s lien any lien filed by a subcontractor, materialman or laborer can be invalidated.

First let me define the terms:

“Home Construction Contract” means a contract entered into between an original contractor and an owner, part owner, or lessee for the improvement of any single- or double-family dwelling or portion of the dwelling or a residential unit of any condominium property that has been submitted to the provisions of Chapter 5311. of the Revised Code; an addition to any land; or the improvement of driveways, sidewalks, swimming pools, porches, garages, carports, landscaping, fences, fallout shelters, siding, roofing, storm windows, awnings, and other improvements that are adjacent to single- or double-family dwellings or upon lands that are adjacent to single- or double-family dwellings or residential units of condominium property, if the dwelling, residential unit of condominium property, or land is used or is intended to be used as a personal residence by the owner, part owner, or lessee.”

"Home purchase contract" means a contract for the purchase of any single- or double-family dwelling or residential unit of a condominium property that has been subjected to the provisions of Chapter 5311 of the Revised Code if the purchaser uses or intends to use the dwelling, a unit of a double dwelling, or the condominium unit as the purchaser's personal residence.

As defined, this statute applies to any home construction contract or any home improvement contract. In order to take advantage of these provision the owner must prove:

1. That he is the owner of a single or double family home pr condominium, and

2. The he has paid the original contractor in full, and

3. Payment was made in full prior to receipt of the lien.

Note the definition of “Home Purchase Contract, DOES NOT include a spec house - A home constructed by a contractor, later sold to an individual intending to use it for their personal residence.

The statute goes on to say if the original contractor has not been paid in full the subcontractor, material supplier, or laborer can only recover an amount equal to the amount still owed on the home construction contract or the home purchase agreement. If more than one lien is filed, those lien holders are only paid a pro rata share of the balance owed to the original contract.

The statute also contains provisions for the invalidation of any lien recorded in violation of the statute. The provisions call for the owner to provide written notice to the lien holder that they have paid the original contractor in full and that payment in full was made prior to receipt of the copy of the lien. If the lien holder fails to satisfy the lien within 30 days, the lien holder is liable to the owner for any damages, including the cost of having the lien invalidated, attorney fees and court costs.

Furthermore, no lending institution is permitted to make any payment to any original contractor until the original contractor has given the lending institution the original contractor's affidavit stating:

1. That the original contractor has paid in full for all labor and work performed and for all materials furnished by the original contractor and all subcontractors, material suppliers, and laborers prior to the date of the closing of the purchase or during and prior to the payment period, except such unpaid claims as the original contractor specifically sets forth and identifies both by claimant and by amount claimed, and

2. That no claims exist other than those claims set forth and identified in the affidavit.

While the lending institution is not financially liable to the owner after accepting an affidavit from the original contractor (in good faith), it can be held liable if it fails to obtain a lien release after receiving a notice that a lien has been filed.

It must be noted, while these provisions of Ohio’s Mechanic’s Lien Law protect the home owner from paying twice for improvements made to their home, other provisions of the lien law fail to protect homeowners as well as they protect the owners of commercial properties. Pursuant to O.R.C. 1311.04(O) and 1311.05(E) and a Notice of Commencement need to posted or recorded and a Notice of Furnishing need not be served when providing labor or materials for a home construction contract.

Ohio's Prompt Pay Provisions - A Statute Designed to Help Lower Tier Contractors and Suppliers Get Paid

Ohio's Prompt Pay provisions, codified in Ohio Revised Code 4113.61, affords the lower tier contractor a resource to obtain payment from his contractor. The provisions, if properly followed, exact severe penalties to the contractor if they fail to pay their subs and suppliers within the statutory time limits. In the event the contractor fails to pay his subcontractors or suppliers within 10 days of being paid for the subcontractor's work or for material supplied, the law provides an 18% per annum interest rate on the amount owed, PLUS attorney fees.

In order to succeed in a claim under the prompt payment law, the subcontractor or supplier must:

1. Prove a valid and enforceable contract claim.

2. Prove that an accurate invoice was submitted to the contractor for payment.

3. Prove that the subcontractor or supplier allowed the contractor sufficient time to include the invoice in the contractor's invoice to the owner;

4. Prove that the contractor was paid for the invoice submitted for work or materials set forth in the subcontractor's or supplier's invoice.

5. Prove that the contractor refused to timely pay the subcontractor or supplier an amount equal to the percentage of completion allowed by the owner; and

6. Prove there is no valid reasons for the contractor to withhold any amount necessary to resolve disputed claims involving the work or materials.

If subcontractor or supplier successfully establish these provisions, the contractor is required to pay the subcontractor or supplier interest in the amount of 18% per annum from the 11th day the payment is not made. The law also allows for attorney fees.

As you can see enforcement of these provisions are highly technical. Competent counsel should be retained to enforce these statutory provisions.

Collecting Your Money

In my many years of practice, I have encountered many clients who have trouble collecting debts owed to them. My first such encounter was a “simple” collection matter. I asked the client to forward his “file” and it consisted of a single invoice (Names are changed for ethical reasons):

ABC Company

1234 Main Street

City, State 11111

July 1, 20–

Mr. & Mrs. Smith

For services rendered $5000.00

Yes, this was the ENTIRE file presented by my client. No contract, no address, no required disclosures – merely the invoice shown above.

While businesses have matured and the obvious mistakes, both tangible and implied, characterized by this invoice are not longer made, this document is symbolic of errors of omission and commission present even in today’s business. Summarizing my experience in collecting debts, errors are categorized as follows: (1) Enforcement issues, and (2) Legal issues.

Enforcement Issues

Initially a company should be sure any contract entered into is enforceable. This means more than a “meeting of the minds.” It also requires that covenants contained in your agreement are enforceable.

Webster simply defines a contract as “A formal agreement between 2 or more persons.” In actuality, it is a bit more complicated. Black’s Law Dictionary is a bit more illustrative of the elements of an enforceable contract by stating a contract is “An agreement, upon sufficient consideration, to do or not to do a particular thing.” It goes on, “It is [an] agreement creating [an] obligation in which there must be competent parties, …legal consideration…, [and] mutuality of agreement…”.

Legal mumbo-jumbo, yes, but the enforcement of your agreement depends upon your ability to prove the defined elements of contract. To enforce your contract these elements must be present in any agreement.

So, what should be contained in my contract in order to enforce the agreement? Here is a short list:

1. Obtain the FULL and LEGAL NAME(S) of the other party.

2. Get the CORRECT ADDRESS. The location where you are performing your services or where you are delivering the goods may not be where the party resides or its main place of business..

3. Be sure you fully define what service or material you are providing.

4. Set forth the terms and amount of your compensation as well as when payment is due.

5. If the other party is preparing the contract make sure all terms, exhibits, and addendums are attached to the executed copy.

What additional information should I collect? Sometimes, in spite of your efforts issues arise regarding the terms of the contract. The following is a list of recommendations:

1. Retain summaries of telephone conversations you have with customers.

2. Maintain labor and material job costs.

3. If possible obtain the social security number or federal identification number of the other party.

Legal Issues

Beyond the ordinary terms of any contract are statutory and legal requirements that impact on the enforceability of any contract. Consumerism, politics and legal precedent have posed additional burdens upon any business.

Over the years, the courts have ruled upon many issues, particularly the enforceability of certain covenants of a contract. Among the covenants applicable are:

Liquidated Damage Clauses – Uniformly, most states have looked unfavorably upon these clauses. Typically, they call for the party to pay a given amount as “liquidated damages” for the party’s of certain terms of the contract. Generally, the courts have severely limited the enforceability of such clauses. The courts have ruled there must be some correlation between the stipulated damages and the actual damages incurred by the contractor. The burden is upon the creditor to prove these damages. The inability of the creditor to prove these damages renders the clause unenforceable.

Warranty Waivers – Most contracts have some limitation to the warranties given by a party. With the advent of the “Uniform Commercial Code,” which has a major impact the law relating to sales of goods, the waiver of warranties or other representations require definitive language to render them enforceable. Each state has promulgated its own rules. I strongly recommend you seek assistance of a professional to determine whether your limitation of warranties clause is statutorily correct.

Collection Clauses – Typically these clauses call for the owner to pay all costs of collection, including attorneys fees, in the event the contractor must sue to collect. The courts seldom enforce these clauses. The reasoning behind this is based upon “public policy,” i.e. that the clauses are fundamentally unfair.

The states have placed additional statutory burdens upon the creditor. Among laws having applicability are:

Consumer Protection Laws – These laws generally define what are unfair sales practices and run the gambit from “bait-and-switch” schemes to sales tactics. Among the more pertinent laws relate to home solicitation sales and estimate requirements. Both laws require statutory language be included in every contract. Home solicitation laws generally require specific language notifying the consumer of their right to cancel a contract within a specific period of time and a form containing additional language outlining their rights. Estimate laws require the contractor to notify the consumer of their right to obtain an estimate for services to be rendered. Both laws materially affect the enforceability of a contract as they provide leverage for the consumer in the event the contractor fails to comply with these statutory requirements.

I also suggest a detailed reading of the provisions of this act. This act has provisions that regulate more than “home solicitation sales.” Consumer protection laws are used to protect the personal consumer against private lenders, auto repair shops, small furniture stores, etc. The regulations enacted under the statutory law has broadened the provisions of the act enormously.

Debt Collection Laws – The Federal government has enacted the “Fair Debt Collection Act” which sets forth rules a collector must follow when collecting a debt on behalf of a client. A number of states have incorporated these rules indirectly by setting forth a violation of the act as an unconscionable act under their consumer laws.

Regulation “Z” – This Federal regulation is applicable to those regularly extending debt. The regulation defines who is a “creditor.” Those thinking such regulations only to banks or other such institutions are patently wrong. The definition includes many small businesses such as car dealers, rental companies, and even individuals allowing for payment over time.

As you can see there are a number of steps you can take to protect the collectibility of monies owed you. Additionally, there are steps you can take to prevent legal entanglements that could prevent the collection of monies owed you. A little accounts receivable management using some of the techniques and preventive measures outline above will go a long way in insuring the collection of money owed you.

Unjust Enrichment - Equitible Relief for the Creditor

Many of my clients fail to recognize that the law does recognize equitable forms of relief when they can not prove the existence of a contract. This is known in the law as "equitable" relief. A perfect example is the typical law school example where the contractor paints the wrong house. He has rendered a benefit to the homeowner but there is not privity of contract between the contrator and the owner. This type of equitable relief is known "Unjust Enrichment."

The theory of unjust enrichment is equitable relief a court will grant when the court deems it unfair that someone obtains a benefit without paying a fair price. This theory of liability arises when there is no privity of contract between the parties, yet one party has obtained a benefit through the other’s efforts. For example, if the XYZ Company supplies construction material for a given job and, through the principal contractor’s default, the XYZ Company does not get paid , the court could award XYZ Company an amount equal to the fair market value for the material. The theory of unjust enrichment is equitable relief a court will grant when the court deems it unfair that someone obtains a benefit without paying a fair price. The court could award the company an amount equal to the fair market value for the material supplied if all the "elements" of unjust enrichment are met.

As I said, there are elements that must be met before the contractor can succeed. These are:

1. A benefit was conferred by the contractor upon the owner of property,

2. The owner knew the benefit was being conferred, and

3. Retention of the benefit by the owner would be unjust without payment.

The latter two elements are the most difficult. The contractor must prove that the owner knew the work was being performed and that it would be inequitable for the owner to retain this benefit without paying the contractor. This final element is what is called “balancing the equities.” For example, if the owner has paid the original contractor in full, the courts, in certain jurisdictions, have stated that it is inequitable to make the owner pay twice and found in favor of the owner. On other hand, where the owner has not paid the original contractor in full or has paid others to complete the work, courts have found in favor of the contractor.

The thrust of this type of relief is that an individual can not just sit and allow another to confer a benefit upon them without paying for it. Examples are when goods are shipped or delivered to the wrong location, the person accepts the goods and uses or resells the goods or when a contractor paints the exterior of a building and the owner allows the painting to continue without notifying the painter that they are painting the wrong building or where the contractor failed to properly perfect a mechanic's lien. To give you a personal example, some years ago I represented a client who was paid even though he demolished the wrong building! My client mistakenly raised the building next door. Luckily, the building he did demolish was condemned and the court awarded my client the reasonable fees for the demolition.

So don't give up hope. There is some relief available even if

Ohio's Mechanic's Lien Law - Public Improvements

In a prior blog, I discussed the use of mechanic's liens and the statutory requirements prior to the recording and perfection of such a lien. That blog discussed the use of mechanic's liens for private improvements - improvements on property owned by non-public individuals and entities. The purpose of this blog is to discuss the requirements when perfecting a "lien on public improvements.

A “Public Improvement” means any construction, reconstruction, improvement, enlargement, alteration, demolition, or repair of a building,..., and any other structure or work of any nature by a “public authority.” A “Public Authority”includes the state, and a county, township, municipal corporation, school district, or other political subdivision of the state, and any public agency, authority, board, commission, instrumentality, or special district of or in the state or a county, township, municipal corporation, school district, or other political subdivision of the state, and any officer or agent thereof.

In applying the law to Public Improvements, the language is really a misnomer as the law does not permit a subcontractor to record a lien upon land owned by a public authority (see definition above). What the law does permit is the right of the subcontractor to place what is termed a “lien upon the fund.” As a result, the prerequisites are somewhat different.

The law is the same when it comes to an owner’s obligation to prepare and have readily available, a Notice of Commencement. Unlike a private improvement, the Notice of Commencement need only be retained by the general contractor (known under this section of the statute as the "original contractor"). It need not be posted or recorded.

While the subcontractor is required to prepare and serve a Notice of Furnishing, the law requires service upon the principal contractor only - not the owner - within 21 days of the of the material being furnished and/or the subcontractor commencing work on the job. Not withstanding this difference, I recommend my clients serve not only the original contractor, but the owner and surety (see my discussion of surety liability in a prior blog).

Having properly served the Notice of Furnishing, the subcontractor may serve an “affidavit” upon the public authority within 120 days of completion of its work, setting forth certain information required. Upon receipt of the affidavit, the public authority must set aside sufficient funds to pay the subcontractor. The public authority is then required to serve a copy of the affidavit upon the principal contractor who must dispute the claim within 20 days. If the claim is undisputed after 20 days, the public authority must pay the subcontractor. Any public authority, principal contractor or subcontractor may dispute the claim and send the claimant a “Notice to Commence Suit” which must be filed within 60 days of receipt of the notice. Once again, proof of service of the documents set forth in these statutes is critical to ensure proof of service and protection of a contractor's rights

Ohio's Mechanic's Lien Law - Private Improvements

Ohio's Mechanic's Lien Law can be a valuable tool to ensure payment to the subcontractor. But, Ohio law obligates those taking advantage of the law to strictly comply with the requirements of the law. Failure to comply with any of the obligations under the law will render any lien invalid.

Ohio’s Mechanics’ Lien Law is governed by various statutes, O.R.C. §1311.01, et seq. The law, which was totally rewritten some years ago, basically divides the law into two categories - private improvements and public improvements. The laws are acutely different depending upon the entity who owns the property upon which the improvement is being made. A “Public Improvement” means any construction, reconstruction, improvement, enlargement, alteration, demolition, or repair of a building,..., and any other structure or work of any nature by a “public authority.” A “Public Authority”includes the state, and a county, township, municipal corporation, school district, or other political subdivision of the state, and any public agency, authority, board, commission, instrumentality, or special district of or in the state or a county, township, municipal corporation, school district, or other political subdivision of the state, and any officer or agent thereof. Any other type of construction or improvement is a private improvement. Private improvements are further broken down into commercial construction and home construction. In this blog I will discuss "private improvements." Subsequent blogs will discuss "public improvements" and "Home Construction Contracts."

The statutes relating to private improvements first require that the owner prepare a Notice of Commencement containing certain information. This notice must be posted on the job site, recorded with the county recorder and be readily available to any subcontractor. A subcontractor is then required to serve upon the owner a Notice of Furnishing which also contains information sufficient to put the owner on notice that the subcontractor is working on that job. This notice MUST be served upon the owner within 21 days of the material being furnished and/or the subcontractor commencing work on the job. While the statutes permit various forms of service, I recommend the owner be served by certified mail, return receipt requested or other like service to ensure the subcontractor has proof that the owner received the required notice. I also recommend the notice be sent to other parties set forth in the Notice of Commencement. Assuming the Notice of Furnishing is completed correctly and served upon the owner, the subcontractor has now perfected its right to file a mechanics’ lien.

If a lien is to be filed due to non payment by the original contractor, the statutes call for strict compliance with the completion, recordation and service of the lien. First, the statutes call for certain detailed information be contained in the lien document. Then, the lien must be recorded in the county recorder’s office within seventy-five days of the last work performed or material furnished. Note, this time period can not be expanded by the use of “repair” work. The time begins to run after the subcontractor has completed substantial work on the premises. Also, note it does take time to obtain the information required in the lien document. Therefore, it is strongly recommended that the decision to place a lien be completed by the forty-fifth (45th) day to give your attorney sufficient time to gather the required information.

After lien is recorded you must serve the owner within thirty days of the recordation date of the lien. Again, the statute calls for various forms of service, but it is recommended the owner be served by certified mail, return receipt requested or other like service to ensure the subcontractor has proof the owner received the required notice and that the various other entities set forth in the Notice of Commencement were served with a copy. In the event the owner refuses to accept service of the lien, the law does provide for others means of service.

There are two important nuances in the law. First, if you are in direct privity with the owner, you need not provide a notice of furnishing. Second, if this improvement is for the private home of the owner, you need not provide a notice of furnishing.

Surety Liability

Most contractors believe that a surety’s liability is absolute if the subcontractor’s statement is not paid. This is not true. Once again, the Ohio Revised Code sets forth the requirements before a subcontractor can demand payment from the surety.

If the subcontractor is owed more than thirty thousand dollars, a Notice of Furnishing has to to be served upon the surety as set forth in the mechanics’ lien law. This means that the surety must be served with a Notice of Furnishing within 28 days of the first work being perfomred or material furnished.

Upon completion of the job, or the last material being furnished, the subcontractor must serve the surety with a statement of the amount due within 90 days of the completion of the contract and acceptance by the owner of the property. After 60 days, the subcontractor can commence a law suit against the surety, but this lawsuit must be filed within one year of acceptance by the owner.

Lets use an example to deonstrate your obligations under the law. You are contracted by the general contractor to supply and install a floor in the new high gymnasium. You commence your work on January 1. You complete the work on March 31 and the board of education provides a notice of acceptance on April 30. The original contractor goes out of business prior to the entire gymnasium is completed and you have not been paid.

What is required of you prior to the surety's liability in this example? First you had to provide a Notice Furnishing to the surety within 30 days of the commencement of your work, or in this example, by January 30. You then must notify the surety within 90 day of the acceptance of the work by the property owner, or in this example, by July 30. Failure to provide either of these notices, on a timely basis, may preclude your sharing any surety's distribution.

I would also point out that many bonds require that all funds (including any retainage) be paid to the original contractor before the surety is obligated to pay the subcontractors. Therefore, if the property owner is retaining funds due to the original contractor’s breach, the surety is not yet liable.

Contract Drafting - What You Say, Or, More Importantly, What You Don’t Say, Can Lead to Disputes with Your Customer

You arrive at the home or office of a prospective customer, form contracts in hand, ready to redress the customer’s needs. After leaving the customer with an estimate (signed by you, but not by the customer), you begin work only to run into constant questions, changes, and consternation between you and your customer. Eventually, you are asked to leave or, worse, the customer refuses to pay. Is this an all-to-often scenario? Such an experience can be avoided by following some simple rules when drafting your estimate.

Put yourself in the place of the customer. Does your customer understand all the terms? As with any other profession, the industry has developed “terms of the trade” that may or may not be easily understood by laymen. While easily understood by members of the trade, they may have an entirely different meaning to the customer. In the event of a dispute, the definition of a term will be construed most favorably on the side of the customer. Therefore, it is vitally important you explain clearly the terms of the contract. Better yet, define your terms, in writing, in the contract. Does the customer understand exactly what you are doing? The “process” you use may be foreign to the customer. They may not understand the necessity to proceed as you recommend. They may even think the process you are using is merely an attempt to extract more money. Be sure to explain, thoroughly, the process you are using and the reason for doing so. Once again, put it in writing.

Have a “meeting of the minds.” Do all parties know and understand what they have agreed to do? Does the customer understand the structural problems the job entails? Are you being realistic regarding your ability to perform what is needed given the customer’s budget? Will the job be a permanent fix or just a temporary solution? If merely temporary, be sure the customer understands the temporary nature of the repairs and agrees.

Always be in a “collection” mode? I’ll never forget the client who gave me a file to collect. The only information in the file was the name “Mr. & Mrs. Smith” and the amount owed. Ask yourself these questions when preparing the contract:

1. What is the full and legal name of the customer?

2. Is the person signing the contract the owner of the property?

3. If not, do they have the authority to enter into a contract on behalf of the owner?

4. What is their home or office address? The address of the job may not be where the invoice should be sent.

Tell them what you will not do. Remember these two statements which should be part of any contract:

1. “There are no covenants or representations made other than those set forth in this contract.”

2. “There are no guarantee or warranties, either oral or written, for fitness for a particular purpose, or otherwise, other than those set forth in this contract.”

By using these two phrases, the customer cannot rely on any representations made outside the written contract nor imply any warranties or guarantees made other than those set forth therein. While these phrases are important restrictions and set forth limitations, they also protect you from the representations of over zealous sales persons.

Get it in writing. Oral agreements are problems waiting to happen. Customers have selective hearing. Your interpretation of what was agreed upon may be drastically different from that of the customer’s. Solution – put your agreement in writing, setting forth the information using the tips outlined above, and have the party is ultimately responsible for payment sign the agreement. Remember, an unsigned estimate is not a written contract. A written contract is defined as one signed by both parties.