Testimony by Prof. Jeff Ferriell in Support of House Bill No. 463 Mr. Chairman Terhar, Vice-Chair Hambley, and Ranking Member Kuhns. My name is Jeff Ferriell and I m here to testify about several aspects of H.B. 463. I am on the faculty at Capital University Law School, where I teach Contracts, Bankruptcy, and Commercial Law. This includes courses on Chapter 1303 of the Ohio Revised Code, which is Ohio s version of Uniform Commercial Code Article 3. I am here today primarily because I serve as a member of Ohio s delegation to the National Conference of Commissioners on Uniform State Laws, which is also known as the Uniform Law Commission (or ULC). I should begin by telling you that I was invited to join the group of lawyers who Rep. Dever and the OSBA brought together to work on this legislation just last fall, close to the end of its deliberations. They invited me to focus attention on portions of the bill that involved changes to Ohio s version of the Uniform Commercial Code, which is the single most important Uniform Act developed by the ULC. However, because the Uniform Law Commission has only recently developed its own Uniform Home Mortgage Foreclosure Procedures Act, I made a couple of efforts to bring this bill into conformity with this new Uniform Act. During that process, I was impressed with the extent to which members of the committee had already worked to balance the interests of both lenders and borrowers to improve Ohio s mortgage foreclosure procedures without unfairly harming either side. From my perspective, arriving late in the process and with a somewhat limited range of concerns, both lenders and home owners interests were well represented, with each side s interests taken seriously in the process that led to this bill. Changes to Ohio Revised Code 1303.38 (UCC 3-309) The most important part of my testimony deals the portions of HB 463 that propose changes to Ohio Revised Code 1303.38. These changes are identical to portions of a broader set of revisions to UCC Articles 3 and 4 that were promulgated by the Uniform Law Commission in 2002. The current version of 1303.38 is based on the pre-2002 version of UCC 3-309. Its language permits a person who is not currently in possession of a negotiable instrument to enforce the instrument if the person had possession of the instrument and was entitled to enforce it when it was lost or stolen. Under the text of 1303.38 (and former UCC 3-309), an assignee who acquired the instrument from the person who lost it, does not qualify and cannot enforce the instrument. Thus if a mortgage note was lost by its owner, and subsequently assigned, the current owner, who didn't have possession of it at the time it was lost, cannot enforce it. 1 Applied literally, this makes it difficult, and sometimes impossible to enforce a mortgage. 1 Current 1303.38 provides: (A) A person not in possession of an instrument is entitled to enforce the instrument if all of the following apply: (1) The person was in possession of the instrument and entitled to enforce it when loss of possession occurred. (2) The loss of possession was not the result of a transfer by the person or a lawful seizure. 1
This was the conclusion reached by the United States District Court in Dennis Joslin Co., LLC v. Robinson Broadcasting Corp. 2 The statutory language involved in that case matched the text of 1303.38. The court held that an assignee which acquired its rights after the assignor had lost the instrument was not entitled to enforce it. Several Ohio courts have recently reached similar conclusions. 3 However, Joslin and these similar Ohio decisions have not been followed by a majority of other courts. Most courts have noted that there is nothing in the language of former 3-309, (upon which 1303.38 is based), which limits the right of a person entitled to enforce an instrument to assign that right. These courts have held that an assignor which was in possession of an instrument when it was lost or stolen has a right under 3-309 to enforce that instrument. 4 Significantly, under UCC 3-203(b), codified in Ohio Revised Code 1303.22(B), the transferee of an instrument obtains any right of the transferor to enforce the instrument. This fundamental shelter rule principle has led most courts in these other jurisdictions to hold that the assignee of a lost or stolen negotiable instrument is a proper plaintiff, despite the language of 3-309 that appears to reach a contrary result. In this respect, the proposed changes to 1303.38 preserve existing case law from most other states, and seek to preserve uniformity among the states on this issue. Ohio courts that have applied the language of 1303.38 rigidly have not considered the effect of 1303.22(B). If taken into consideration and properly applied, the shelter rule would give an assignee the right to enforce the instrument if it acquired ownership of the instrument and the right to enforce it from the person who lost it. (3) The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. (B) A person seeking enforcement of an instrument under division (A) of this section must prove the terms of the instrument and the person's right to enforce the instrument. If that proof is made, divisions (A) and (B) of section 1303.36 of the Revised Code applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection for the person required to pay the instrument may be provided by any reasonable means. 2 977 F. Supp. 491, 33 U.C.C. Rep. Serv. 2d 1170 (D.D.C. 1997). 3 Fannie Mae v. Hicks, 35 N.E.3d 37(Ohio Ct. App. 2015); Soc'y of Veterans Affairs v. Leonhardt, 28 N.E.3d 1 (2015) 4 Bobby D. Associates v. DiMarcantonio, 2000 PA Super 132, 751 A.2d 673, 41 U.C.C. Rep. Serv. 2d 878 (2000); YYY Corp. v. Gazda, 145 N.H. 53, 761 A.2d 395, 41 U.C.C. Rep. Serv. 2d 222 (2000); Southeast Investments, Inc. v. Clade, 40 U.C.C. Rep. Serv. 2d 255 (N.D. Tex. 1999), aff'd, 212 F.3d 595 (5th Cir. 2000); Beal Bank, S.S.B. v. Caddo Parish-Villas South, Ltd., 218 B.R. 851, 34 U.C.C. Rep. Serv. 2d 1103 (N.D. Tex. 1998); NAB Asset Venture II v. Lenertz, Inc., 36 U.C.C. Rep. Serv. 2d 474 (Minn. Ct. App. 1998). 2
To be sure, permitting a person who does not have possession of an instrument to enforce it, has some potential drawbacks. Enforcement of a lost instrument carries a risk that the instrument will surface in the hands of someone with rights of a holder in due course. A holder in due course, who takes the instrument in good faith, for value, and without notice of any defense, takes free from the defense that the instrument has already been paid. 5 But, 1303.38 protects against this risk, as it always has, by preventing enforcement of the lost instrument unless "adequate protection" is provided to the makers of the note, to protect them from being exposed to double liability. In many cases, the financial stability of the person seeking to enforce the instrument is sufficient, all by itself, to adequately protect the maker. In other cases, courts should usually require an indemnification agreement supported by a bond or insurance policy protecting the maker from the possibility that the instrument will surface in the hands of a person who can enforce it, even though it has already been paid through foreclosure of a mortgage or otherwise. Changes to Ohio Revised Code 1303.16 (UCC 3-118) House Bill 463 makes one more change to Chapter 1303. Section 1303.16 currently imposes a six-year statute of limitations on the enforcement of negotiable promissory notes. The current bill, at lines 125-132, would have Ohio adopt non-uniform language that extends the statute of limitations, for notes secured by a real estate mortgage, to twenty-one years. As a general matter, I m opposed to changes which make Ohio s enactment of the Uniform Commercial Code non-uniform. Moreover, my research indicates that only one state has extended the 3-118(a) statute of limitations for promissory notes: Missouri, which extended it to ten years. Two other states, Arkansas and Louisiana reduced the period from six years to five years. Foreclosure of Abandoned Properties Proposed Ohio Revised Code 2308.02 House Bill 463 proposes an expedited foreclosure procedure for mortgages on abandoned property. The proposed procedure is in Ohio Revised Code 2308.02 beginning at line 233 of the bill. Some opponents of this provision have expressed concern that it doesn t provide enough protection for mortgagees who have not abandoned their residence. Although I was not directly involved in the development of 2308.02, I was involved as a member of the Uniform Law Commission in the development of it s proposed Uniform Home Foreclosure Procedures Act which was finalized and submitted to the states for enactment, last summer, after three years of work. Significantly, 2308.02 provides a greater degree of protection for mortgagees than the uniform act in one key respect. Proposed 2308.02(C)(3) permits expedited foreclosure only if the mortgagee proves that five of eleven possible factors indicating that the property is vacant or abandoned are true. These eleven factors, listed a lines 263-291 of the bill are 5 Ohio Revised Code 1303.35 (UCC 3-305) 3
(a) Gas, electric, sewer, or water utility services to the property have been disconnected. (b) Windows or entrances to the property are boarded up or closed off, or multiple window panes are broken and unrepaired. (c) Doors on the property are smashed through, broken off, unhinged, or continuously unlocked. (d) Junk, litter, trash, debris, or hazardous, noxious, or unhealthy substances or materials have accumulated on the property. (e) Furnishings, window treatments, or personal items are absent from the structure on the land. (f) The property is the object of vandalism, loitering, or criminal conduct, or there has been physical destruction or deterioration of the property. (g) A mortgagor has made a written statement expressing the intention of all mortgagors to abandon the property. (h) Neither an owner nor a tenant appears to be residing in the property at the time of an inspection by an appropriate [governmental] official (i) Government employees provide written statements indicating that the structure on the land is vacant and abandoned. (j) The property is sealed because, immediately prior to being sealed, it was considered by an appropriate official, to be open, vacant, or vandalized. (k) Other reasonable indicial of abandonment exist. A similar provision in the Uniform Law Commission s proposed act, makes it far easier to establish a rebuttable presumption that mortgaged property is abandoned. Under 603(a) of the Uniform Act, property is presumed to be abandoned property if: (1) A [building inspector] determines that the property is abandoned (2) Three or more of the following apply to the property: (A) there are (i) one or more doors on the property that are boarded up, broken off, or continuously unlocked; (ii) multiple windows that are boarded up or closed off; or (iii) multiple window panes that are broken. (B) Gas, electric, or water service to the property has been terminated or utility consumption is so low that it indicates that the property is not regularly occupied. (C) Rubbish, trash, or debris has accumulated on the property. (D) A governmental agency has determined that the property is unfit for occupancy or poses a threat to public health or safety. (E) A creditor has changed the locks or otherwise secured the property, and for at least 30 days thereafter, the homeowner has not contacted the creditor to request entrance to the property or re-entered the property. (F) One or more written statements signed by the homeowner indicate a clear intent to abandon the property. (G) A law-enforcement agency has received reports of at least two separate incidents of trespass, vandalism, or other illegal acts being committed on the property in the 180 days before the determination of abandonment is sought. (H) The homeowner is dead and there is no evidence that a household member or heir of the homeowner is in actual possession of the property. 4
This proposed Uniform standard is easier to satisfy that the standard in House Bill 463. In House Bill 463 a building inspector s determination that the property is abandoned is merely one of eleven factors. In the Uniform Act a building inspector s determination that the property is abandoned establishes the presumption. Moreover, House Bill 463 makes it necessary to establish five factors that demonstrate abandonment while the Uniform Act creates a presumption of abandonment if only three of eight factors are established. Finally, the clear and convincing standard of proof in House Bill 463 is more difficult to meet than the preponderance of the evidence standard that governs factors in the Uniform Act. While I believe that House Bill 463 provides sufficient protection for owners of abandoned property, it might be improved by language, similar to what appears in 102(1) of the act, that unoccupied property is not abandoned if it is (A) undergoing construction, renovation, or rehabilitation that is proceeding with reasonable diligence to completion; (B) physically secured and used or held for use as a vacation or seasonal home; or (C) physically secured and the subject of a probate action, action to quiet title, or other litigation in which ownership is contested. Thank you for your time and the opportunity to provide this testimony. I ll be glad to try to answer any questions about these features of House Bill 463. 5