On December 19, 2014, Ohio Governor John R. Kasich signed into law Substitute House Bill 9 (the “Act”), with an effective date of March 23, 2015, which amends Ohio’s receivership statute to permit a court-appointed receiver, under certain conditions, to sell receivership property free and clear of liens. The Act also includes notice and hearing provisions for a receiver’s sale of real property, provisions for the redemption of real property following a receiver’s sale, and a receiver’s post-closing reporting requirements.
Cases Eligible for the Appointment of a Receiver
Ohio Revised Code (“O.R.C.”) Chapter 2735 is Ohio’s general receivership statute. O.R.C. Section 2735.01 lists the conditions upon which an Ohio court may appoint a receiver, either for the disposition of specific property or to manage the affairs of a particular corporation, limited liability company, partnership, limited partnership, or other entity.
With respect to specific property, O.R.C. Section 2735.01(A)(2) authorizes a court to appoint a receiver to manage and sell mortgaged property in a foreclosure case, if at least one of the stated predicate conditions, and at least one of the stated qualifying conditions, are satisfied.
Under the Act, the predicate conditions are that (1) the mortgaged property appears to be in danger of being lost, removed, or materially injured, (2) the condition of the mortgage has not been performed, or (3) the mortgaged property has “diminished in value, or squandered” (this third condition was added by the Act).
Even if the foreclosing mortgagee has satisfied one of the three predicate conditions, the mortgagee must also satisfy at least one of the qualifying conditions to have the court appoint a receiver. Prior to the Act, the only qualifying condition was that the mortgaged property is probably insufficient to satisfy the mortgage debt (the mortgage is “underwater”). The Act added an alternative qualifying condition, namely, that the mortgagor has consented in writing to the appointment of a receiver. Most lenders already include a provision in their commercial mortgages that the mortgagor consents to the appointment of a receiver over the mortgaged property following a default on the mortgage.
The Act also added new O.R.C. Section 2735.01(A)(3), which authorizes a court to appoint a receiver to enforce a contractual assignment of rents and leases. The Act does not limit that appointment to mortgage foreclosure cases, thereby possibly giving a lender the option of enforcing its assignment of rents through a receiver without also having to foreclose its mortgage.
Qualifications of a Receiver
O.R.C. Section 2735.02 describes the qualifications for a court-appointed receiver in Ohio. The Act amends that Section to:
(1) Allow a party to an action, an attorney for a party, or a person otherwise “interested” in an action, to serve as a receiver, but only with the consent of all parties to the action and all other persons that have an interest in the property that is the subject of the action; and
(2) Provide that, in selecting a receiver, the court should afford priority consideration to any of the “qualified persons” nominated by the party seeking the receivership, but no nomination of “qualified persons” for the receivership is binding on the court.
With respect to who is a “qualified person” to serve as a receiver, O.R.C. Section 2735.02 provides that “[n]o person except a resident of this state shall be appointed or act as a receiver of a corporation, partnership, limited liability company, or other entity created under the laws of this state.” O.R.C. Section 2735.02 is silent, however, as to whether receivers of specific property, such as a receiver in a mortgage foreclosure case, also must be a resident of Ohio.
Authority of Court-Appointed Receiver
The Act amends O.R.C. Section 2735.04 to specify the powers of a court-appointed receiver: (1) the execution of contracts of sale and leases, (2) the execution of contracts for construction and for the completion of construction work, but only if entering into those contracts will not impact existing lien rights, (3) the execution of deeds, leases, or other documents of conveyance of real or personal property, and (4) the opening and maintaining of deposit accounts in the receiver’s name.
In addition, the Act amends O.R.C. Section 2735.04 to include as court costs or administrative expenses (giving them priority of payment over payments to creditors) any funds that are expended by or on behalf of the receiver, including receiver’s fees, the fees of professionals assisting the receiver, and funds for the completion of construction work authorized by the court. Under new O.R.C. Section 2735.04(C), a court may require a party to make an additional deposit with the court to cover funds that the receiver may expend under a contract, if that party requested or consented to the receiver entering into the particular contract.
Public or Private Receiver’s Sale of Property
The Act also adds a new O.R.C. Section 2735.04(D) to codify recent Ohio court decisions permitting a receiver, subject to the approval and supervision of the court, to sell property free and clear of liens. Under O.R.C. Section 2735.04(D)(1)(a), a receiver may sell receivership property by (1) private sale under a written contract between the receiver and a purchaser, (2) private auction, (3) public auction, or (4) any other method that the court determines:
(a) to be fair to the owner of the property and all other parties with an interest in the property,
(b) is reasonable under the circumstances, and
(c) will maximize the return from the property to the receivership estate, considering the potential cost of the receiver holding and operating the property.
The Act also adds a new O.R.C. Section 2735.04(D)(1)(b), which permits a court, before entering an order authorizing a sale of receivership property, to require the receiver to provide evidence of the value of the property. The valuation may be provided by “any evidence that the court determines is appropriate.” O.R.C. Section 2725.04(D)(1)(b) also permits the court to establish a minimum bid for a public or private auction of receivership property.
By adding new O.R.C. Section 2735.04(D)(1)(c), the Act provides some protection to unsuccessful purchasers of receivership property. Specifically, O.R.C. Section 2735.04(D)(1)(c) authorizes a court to require a receiver to solicit and consider additional offers, if the receiver has requested court authority to sell receivership property to a prospective purchaser. If the receiver then sells the property to someone other than that prospective purchaser, the court may award the prospective purchaser a reasonable amount of costs and expenses from the proceeds of the sale of the property, as determined by the court. That amount compensates the prospective purchaser for participation in the sale process to the extent that the participation brought “value” to the receivership. O.R.C. Section 2735.04(D)(1)(c), however, does not define “value.”
Procedure for a Receiver’s Sale of Real Property
Conditions Precedent to a Receiver’s Sale
The receiver or the first mortgage holder must first apply to the court for an order authorizing the receiver to sell the specific real property (the “Application”), and the Application must:
(a) Set forth the proposed procedures for the conduct of the sale, if the receiver has not received a specific offer that the receiver desires to accept, or
(b) Identify the buyer and include the proposed terms of the sale, if the receiver has received a specific offer that the receiver desires to accept.
The receiver must give at least ten days’ prior written notice of a proposed sale (the “Sale Notice”) to the owner of the real property, all parties to the action, and all other holders of a lien encumbering the real property, which lien was filed or recorded prior to the filing of the complaint in the action. Each person receiving the Sale Notice must have the opportunity to be heard at a court hearing on the proposed sale, but the court has the option of waiving the hearing requirement if no such person requests a hearing or objects to the proposed sale. The court then issues an order of sale of the real property (the “Order of Sale”), which sets forth the required procedure for the sale or the terms of a sale under contract.
Under new O.R.C. Section 2735.04(D)(3), if the receiver or the first mortgage holder wants the real property sold free and clear of liens, the Application must include that request. The court will rule on that request following the hearing on the Application and the giving of the Notice of Sale, as described above. If the court finds that the sale of the real property free and clear of liens is in the best interest of the receivership estate, the receiver can sell the property free and clear of all liens other than the lien of the county for real estate taxes and assessments.
Equity of Redemption
The Order of Sale must permit the owner of the property, and any other party having an equity of redemption in the property, to exercise the equity of redemption within a reasonable time, but not less than within the three-day period following the date of the Order of Sale. Under new O.R.C. Section 2735.04(D)(8)(a), the redemption amount is the greater of (a) the sale price at which the real property was sold, or (b) the amount equal to the total of all liens on the real property that would be cancelled by the receiver’s sale, including principal, interest, costs, and other amounts secured by those liens through the date that the redemption amount is paid to the receiver.
Upon the receiver’s receipt of the redemption amount, the person that paid that amount will retain or obtain title to the property, as applicable, and the liens against the real property transfer to the redemption amount in the same order of priority as they held against the real property.
Confirmation, and Receiver’s Certificate and Report of Sale
Under new O.R.C. Section 2735.04(D)(5) and (6), the court is required to enter a confirmation of a receiver’s sale of real property unless the receiver sold the real property under a specific offer for sale that the receiver desired to accept, and the court issued an Order of Sale approving that offer (a ”Private Sale”).
Upon the closing of the receiver’s sale of real property, the receiver must deliver to the purchaser a receiver’s deed to the real property. The recordation of the receiver’s deed for the real property cancels the liens, other than the county’s lien, and the cancelled liens transfer to the sale proceeds with the same order of priority as they held against the real property.
Under new Section 2735.04(D)(10), if the receiver sold the real property in a Private Sale, then, as soon as reasonably practicable after delivering the receiver’s deed to the purchaser, the receiver must file with the court, and serve on all parties and all persons who received a notice of the filing of the Application, a certificate and report of sale.
Under new O.R.C. Section 2735.04(D)(10), the receiver must certify all of the following in the certificate and report of sale:
(1) That the sale was conducted in accordance with the order of sale;
(2) The date of the sale;
(3) The name of the purchaser;
(4) The purchase price;
(5) The amount of the net proceeds of the sale after payment of expenses associated with the sale;
(6) A copy of the closing statement, if a closing statement was prepared; and
(7) Any other information that the court may require.
The Act is important in that it expands on the qualifications for a court-appointed receiver, codifies a court-appointed receiver’s ability to sell real property free and clear of liens, in lieu of a Sheriff’s sale, and provides a procedural framework for receiver’s sales, including objections to a proposed receiver’s sale, the conditions necessary for a receiver’s sale free and clear of liens, and the receiver’s post-closing reporting requirement. Because the Act sets out, on a step by step basis, the process for a receiver’s sale free and clear of liens, foreclosure attorneys, current and potential receiver candidates, and other insolvency professionals should welcome the passage of the Act.
Donald E. Miehls, Esq.
Walter | Haverfield LLP
This overview is intended as general information only. Please note that this information is not legal advice. The reader should consult an attorney with knowledge in this area of the law to determine how the information applies to any specific situation.
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