The American Bankers Association (“ABA”) is the country’s largest national banking trade association. It represents banks and holding companies of all sizes in each of the fifty states and the District of Columbia. The ABA also represents savings associations, trust companies, and savings banks. ABA members hold approximately 95% of the United States banking industry’s domestic assets, including in Ohio. The ABA frequently appears in litigation, either as a party or amicus curiae, to address the interests of the banking industry and its members. Here, the ABA is concerned about the effect of the appealed decision on its Ohio members, as well as the potential ripple effect on its members in other states flowing from a disputed interpretation of a provision of the Uniform Commercial Code.
Every year, there are billions of dollars of bonds issued to finance private and public improvements like roads, water lines, and commercial and government construction projects. Banks, including ABA members, regularly serve as trustees in connection with the issuance of such bonds. There are trillions of dollars of securities issued where banks, including ABA members, have served as trustees. The stock of many members of the ABA is publicly traded.
In Cheatham v. Huntington Natl. Bank, 6th Dist. Lucas No. L-16-1292, 2017-Ohio-9234 (the “Decision”), the Sixth District Court of Appeals, under the guise of statutory interpretation, created new law that affects all of these bonds and securities. The Decision held that R.C. 1308.16(A) (Section 8-302 of the Uniform Commercial Code (“U.C.C.”)), which provides that “a purchaser of a [] security acquires all rights in the security that the transferor had,” also transfers claims relating to the security—in this case, a claim for breach of a trust indenture. (Emphasis added.) In doing so, the Decision puts Ohio law in conflict with the laws of other states, muddles to whom trustee banks owe legal duties, and potentially subjects banks to double liability.
In answering the question, who owns legal claims against an indenture trustee after a transfer of bonds, the Decision applies a blunt instrument to nuanced legal issues involving the competing interests of uniformity (e.g., the interpretation of a U.C.C. provision) and Ohio-specific issues (e.g., the impact of how a “chose of action” is to be transferred under Ohio law). The new principle announced by the Decision is novel, and if allowed to take root, has the capability of roiling securities markets by sowing uncertainty among market participants and disunity among states interpreting the U.C.C.
This Court has yet to interpret U.C.C. § 8-302. Thus, the interpretation set forth in the Decision will have an out-sized impact on the development of the law and the behavior of participants in the bond markets in Ohio and, potentially, beyond. The courts elsewhere that have interpreted U.C.C. § 8-302 have generally agreed with Huntington’s position, though some have differed, and there is a meaningful number of concurring and dissenting opinions, as is typical of an underdeveloped area of the law. The Decision itself contains a concurring opinion, which offers three different proposed grounds in support of the ultimate holding. And, of course, the trial judge below (whose ruling was reversed by the Decision) had a different view of things altogether. All of this is evidence of the need for guidance from this Court, for the benefit offuture trustees and bondholders (and potential claimholders) who may be involved in disputes over who owns claims after a transfer of bonds.
The Decision construes (for the first time in Ohio) a U.C.C. statutory provision in a manner which conflicts with other states’ interpretations of that law. That statute applies not only to bonds (like those at issue here) but to “securities,” including a “share or similar equity interest” issued by a corporation. The Decision affects (and disturbs) settled principles in shareholder derivative actions, and potentially creates a new and unexpected cause of action in connection with bonds and securitized trusts.
Because other states have interpreted this provision differently, the Decision potentially subjects banks to differing liability, depending on the claim which has been asserted. The holding in the Decision also conflicts with Ohio law which normally requires an express assignment of choses in action.
In short, this case presents the Court with questions of great general interest affecting Ohio residents, as well as the corporations and banks that do business in Ohio. This Court should accept jurisdiction to resolve these novel and momentous issues.
