Ohio House Bill — The Ohio Legacy Trust Act and Due Diligence Concerns

How will the bank know that an obligor (borrower or guarantor) has established a Legacy Trust and has transferred property into it in a "qualified disposition?"

Due diligence.  There is no public filing requirement. The transferor (with one exception) must sign a qualified affidavit pursuant to Ohio Revised Code (ORC) Section 5816.06.  The qualified affidavit will likely stay in a lawyer’s file.  However, there is no requirement that a lawyer or other professional such as an accountant must be used in establishing a Legacy Trust.  An individual, in compliance with the statute, could establish a valid Legacy Trust.

Can there be more than one qualified disposition of property in the Legacy Trust?

Yes, but a qualified affidavit may be required in each instance.  A subsequent qualified affidavit is not required in connection with any qualified disposition made after the execution of an earlier qualified affidavit, if that disposition is a part of, required by or the direct result of a prior qualified disposition made in connection with the earlier qualified affidavit.

What effect does a transfer of assets by a borrower have with respect to loan documentation?  Should (or can) the bank insert provisions in loan documents to try to address possible issues arising with a Legacy Trust?

Are there change of ownership clauses in the loan documents? Review the underlying loan documentation for language in security agreements or mortgages such as:

• "The Grantor represents, warrants and covenants to _________________ that… (c) except as herein provided, the Grantor will not hereafter without _________________’s prior written consent sell, pledge, encumber, assign or otherwise dispose of any of the Collateral…," or a

• Due on Sale Clause, such as: "The Mortgagor shall not sell, convey or otherwise transfer any interest in the Property (whether voluntarily or by operation of law), or agree to do so, without the Mortgagee’s prior written consent, including (a) any sale, conveyance, encumbrance, assignment, or other transfer of (including installment land sale contracts), or the grant of a security interest in, all or any part of the legal or equitable title to the Property, except as otherwise permitted hereunder;  * * * * *  Any default under this Section shall cause an immediate acceleration of the Obligations without any demand by the Mortgagee."

What happens if a bank’s obligor, who has given the bank a mortgage or other secured interest, then enters into a Legacy Trust?

Assuming that the lien given prior to entry into the Legacy Trust is valid, nothing happens to the secured interest. A valid lien and lien rights follow the collateral into the trust. ORC Section 5816.10 (G) provides, in part, that any valid lien attaching to property before a disposition of that property to a trustee of a Legacy Trust shall survive the disposition.  The trustee shall take title to the property subject to the valid lien and subject to any agreements that created or perfected the valid lien. Nothing in this chapter shall be construed to authorize any disposition that is prohibited by the terms of any agreements, notes, guaranties, mortgages, indentures, instruments, undertakings or other documents.

Is the bank permitted to foreclose on a mortgage or exercise rights and remedies with respect to collateral even if the collateral is in a Legacy Trust?

Assuming the lien is valid and the lien predated the establishment of the Legacy Trust, nothing happens to the secured interest and the bank may exercise all of its rights and remedies as provided in any agreements, notes, guaranties, mortgages, indentures, instruments, undertakings or other documents.

What happens when a mortgagor (with an Ohio open end mortgage with a maximum amount of $Y) enters into a Legacy Trust and later wants to increase that maximum open end amount to $Y +?  What if the mortgage is very specific to a particular note (as is often the case)?  Will an amendment or restatement of the note create issues?

As to an increase in the open end amount, the mortgage can be amended.  But real property assets (over and above those subject to a valid mortgage lien in favor of the creditor) in the Legacy Trust may not be subject to the mortgage.  The language within the mortgage will need to be reviewed to see if it proactively addresses the particular facts of the case.

One can imagine factual disputes as to the value of property transferred into a Legacy Trust since the property actually subject to the open end mortgage remains the same; but the amount of value of that property available to satisfy the mortgage may be limited by the open end amount. 

What happens when a guarantor (with a limited guaranty with a maximum amount of $Y) enters into a Legacy Trust and later wants to increase the amount of the guaranty?

The guarantor can increase his or her obligations under the guaranty. The establishment of the Legacy Trust does not preclude doing so. However, the assets, if not subject to a prior valid lien, transferred into the Legacy Trust are not reachable by the creditor.

What happens when a guarantor (with a limited guaranty with a maximum amount of $Y and who has granted to a bank a security interest to secure the guaranty) enters into a Legacy Trust and later wants to increase the amount of the guaranty?

The guarantor can increase his or her obligations under the guaranty. The establishment of the Legacy Trust does not preclude doing so.  But assets (over and above those subject to a valid lien in favor of the creditor) in the Legacy Trust are not reachable by the creditor. 

What happens with a grantor of a secured interest who grants a lien in specific collateral and then enters into a Legacy Trust and with the passage of time the secured creditor wants to maintain its lien in replacement collateral or accessions (or, for example, the grantor grants a lien in a motor vehicle and later gets a new car)?

Review the original loan documentation to see how the security agreement defines the collateral – is after acquired property or replacement property included?

Will this impact "bad boy" guaranties or "contingent" or "springing" guaranties where the liability may not arise until long after the guaranty is signed?

Once assets are in a valid Legacy Trust, those assets are not reachable by the creditor.  These types of guaranties usually are truly unsecured except as to future income, paychecks, property, etc. which might arise after the establishment of a Legacy Trust.

Assuming the terms of the Legacy Trust permit or require distributions of income or principal, can the bank get at those distributions?

Once received by the Transferor of the Legacy Trust, the income is attachable by any creditor.  However, routine exemptions may protect the income from attachment.

Can a creditor challenge a transfer of assets into a Legacy Trust?

There is a very heavy burden of proof and, unlike in other instances, attorney fees are to be awarded to the winner of any litigation.  That means that if a bank challenged and lost, it might be responsible for paying for all the legal fees.