Receiver’s Sales As An Alternative To Foreclosure Sales In Ohio

By: Larry R. Rothenberg, Partner

Ohio has a statutory scheme for foreclosures, which generally mandates a judicial action resulting in a public sale by the county sheriff or other officer of the court, or by a licensed auctioneer.

In order to provide some protection for the owner whose property is to be sold through foreclosure, the law requires that the sheriff or other officer retain three disinterested freeholders (usually experienced appraisers), who are residents of the county, to appraise the property. The minimum bid for the sale must be at least two-thirds of the appraised value.  A notice of the sale is required to be filed and served on the parties, and published once a week for three weeks, beginning not less than 30 days prior to the sale.  Assuming a bid is entered at the sale, the court must review the record to determine whether it is satisfied of the legality of the sale, and if so, enter an order confirming the sale.  The owner has a right to redeem the property even after the sale is complete, until the order confirming the sale is entered.

The objective of having the property sold by public auction is to derive the maximum sale price, for the benefit of the creditors, who are seeking the maximum recovery, and also for the owner, who is entitled to the excess proceeds, if any, and who may be liable for a deficiency judgment.

In appropriate cases, the court may appoint a receiver to protect and manage the property, and to collect rents from any tenants while the foreclosure is pending.  Occasionally, while the case is pending, the receiver might identify a party interested in purchasing the property for a favorable price.  Although the law states that a receiver may “generally do such acts respecting the property as the court authorizes,” it does not expressly give the court the authority to circumvent the statutory scheme for foreclosures by authorizing the receiver to sell the property privately, free and clear of the interests of all parties.  Would such a conveyance by a receiver, even with the express authority of an order of the court, nevertheless be vulnerable to attack?

The Court of Appeals for one district in Ohio recently approved such a sale in Park National Bank v. Cattani, Inc., 187 Ohio App. 3d 186, 2010 – Ohio – 1291 (12th District, Warren Count).  A mortgage holder filed the foreclosure on commercial property containing a gas station, a convenience store, and a fast-food restaurant, and the court appointed a receiver to preserve and protect the property.  The order appointing the receiver stated, “The receiver may sell the property at one or more public or private sales on notice to the parties to this action and such other notice as the receiver deems appropriate.”

The plaintiff and the receiver filed a joint motion to grant the receiver authority to sell the real and personal property by private sale “free and clear of all liens and encumbrances,” and the court granted the motion, despite the objection of another lienholder, who then filed an appeal to the court of appeals prior to the closing of the sale.

Some facts cited by the trial court judge supported the argument that the sale by the receiver would be particularly appropriate.  The gas station had ceased to operate and the convenience store also had to be shut down because it was unable to renew its liquor license, and therefore, was not financially viable.  In addition, the operator of the fast-food restaurant testified that he saw a significant decrease in business when the accompanying gas station and convenience store were closed, and therefore, the restaurant would also be forced to close unless the property was sold promptly.  The receiver testified that the purchase price was the best opportunity for creditors to make a recovery.

The Court of Appeals agreed with the trial court, and upheld the validity of the sale, noting that a receiver is “an officer of the court and at all times subject to its order and discretion,” and may “generally do such acts respecting the property as the court authorizes.”  The Court of Appeals cited the Ohio Supreme Court’s interpretation of the receivership statute “as enabling the trial court to exercise its sound discretion to limit or expand a receiver’s powers as it deems appropriate.”

Hence, because the receivership statute does not contain any restrictions on what the court may authorize when it issues orders regarding receivership property, the Court of Appeals held that this includes the power to authorize a receiver, under certain circumstances, to sell property at a private sale free and clear of all liens and encumbrances.  Because the Court of Appeals found that trial court did not abuse its discretion in its order, the Court of Appeals decided not to disturb the trial court’s judgment.

Although this case is not binding authority on any of the other districts in Ohio, and it relied in part on the particularly significant facts, it can be cited in support of a similar motion to authorize a receiver in other cases to sell the property free and clear of the interests of all parties.

For a complete copy of the case, go here.

Weltman, Weinberg & Reis Co., LPA will keep you advised of further developments with regard to this issue, as we continue to seek alternatives to achieve the maximum results in foreclosure cases.

If you have any questions or would like to discuss this issue in more detail, please contact Larry Rothenberg at (216) 685-1135 or via email at lrothenberg@weltman.com. Larry is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., LPA. He is the author of the Ohio Jurisdictional Section contained within the treatise, “The Law of Distressed Real Estate”, published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania, Michigan and Florida.

 

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