New legislation ratifies a receiver’s right to sell property free and clear of liens.
Receivers have historically been appointed as an equitable remedy. The law of receiverships dates to the 17th Century and evolved from England’s courts of equity. The receiver was an officer of the court that was subject to a court’s inherent equitable powers. The duties of a receiver were seen as receiving assets as a neutral, disinterested third party and safeguarding them. As an alternative, a receiver could dispose of those assets in the best interests of the creditors of a debtor and then distribute the funds created by such disposition in a fair and just manner. Creditors could file their claims with the receiver and receive a dividend.
In federal court, the practice of administering a receivership estate was required to be “… in accord with the historical practice in federal courts or with a local rule.” (See Fed. R. Civil. P. 66). Federal receiverships are also governed by statutes such as 28 U.S.C. Section 959 which provides that receivers may sue and be sued and such actions shall be “… subject to the general equity power of such court so far as may be necessary to the ends of justice…”
In Ohio, the right to a receiver has been statutory. (See ORC Chapter 2735). Chapter 2735 has been unchanged since 1953 and it consists of six relatively short sections spanning about one and half total pages. Case law was relatively scarce and did not provide much substance on the appointment of a receiver or the duties of the receiver outside of the general vague powers set forth above.
With the recent tidal wave of sales of assets free and clear of liens, claims and encumbrances in federal bankruptcy cases under 11 U.S.C. 363, some states began to modernize their receivership statutes to mimic the process under Section 363. The “gold standard” for buyers of distressed assets became the “Section 363 Order”. Unfortunately, the costs associated with the bankruptcy process served as a deterrent to filing a Chapter 11 bankruptcy for all but the largest companies. Washington and Minnesota were two of the states which lead the march in revising their state receivership laws to provide a more effective remedy with more detailed provisions. (See Washington Substitute Senate Bill 6189; Minn. Chapter 576). Chapter 2735 had no provisions which explicitly authorized the sale of assets by a receiver free and clear of liens.
On March 29, 2010, in Park National Bank v. Cattani, the Twelfth District Court of Appeals affirmed the trial court’s authorization of a receiver’s private sale of property free and clear of liens and encumbrances because the sale was properly conducted according to due process requirements and benefitted the creditors of the receivership estate.1 The Cattani case was followed by a case out of the Eighth District Court of Appeals affirming a receiver’s right to sell property free and clear of liens.2
On January 30, 2013, House Bill No. 9 (“H.B. No. 9”) was introduced to the 130th General Assembly. H.B. No. 9 contained a number of modifications and clarifications to Ohio’s receivership laws and rewrote Chapter 2735 of the Ohio Revised Code. H.B. No. 9 codified the Cattani decision and provided express language that a receiver had the authority to sell property free and clear of liens. After a yearlong discussion and review by the Legislature, HB No. 9 was passed in December, 2014 and the Governor duly signed the bill into law. The effective date will be March 23, 2015.
The following is a summary of some of the more significant changes to the receivership statute created by H.B. No. 9.
- Creates new Section 2735.04(D), subsections (1) through (10), which provide that a receiver, subject to court approval and the requirements set out in this section, may sell property free and clear of liens by private sale, by private auction, by public auction, or by any other method that the court determines is fair to parties with an interest in the property. The statute contains a series of procedural and notice requirements that a receiver will need to comply with in order to sell the property free and clear of liens. Upon the recording of a deed by the receiver to the purchaser, the liens of secured creditors will be transferred to the proceeds of the sale with the same priority as such liens had prior to the sale.
- Creates a requirement that the court must establish a reasonable time, but not less than three days, after the date of the order approving the sale or the sale process for the owner and all other parties possessing an equity of redemption in the property to exercise their redemption in the property or to have the equity of redemption forever barred. • Amends Section 2735.04(B) of the Ohio Revised Code to clarify the powers of a receiver by providing that, under the control of the judge and court that appointed the receiver, the receiver may:
- Bring and defend actions in the receiver’s own name as receiver;
- Take and keep possession of real or personal property;
- Collect rents and other obligations and compromise demands;
- Enter into contracts, including, but not limited to contracts of sale, lease or so long as existing lien rights will not be impacted, contracts for construction and for the completion of construction work;
- Sell and make transfers of real or personal property;
- Execute deeds, leases, or other documents of conveyance of real or personal property;
- Open and maintain deposit accounts in the receiver’s name; and
- Generally do any other acts that the court authorizes.
- Expands the grounds under which a receiver can be appointed under Section 2735.01, including a provision found in Section 2735.01(2) (b) that provides “the mortgagor has consented in writing to an appointment of a receiver.” This is a key change in the grounds for the appointment of a receiver and should be noted by all commercial lenders in Ohio. Based upon this amendment, it is critical that the mortgage and/or security agreement contain a provision that a receiver may be appointed in the event of a default in the remedies section of a mortgage and/or security agreement. The existence of such a provision provides for a much lower threshold for a receiver to be appointed.
Finally it is worth noting that a draft of a Model Commercial Real Estate Receivership Act was circulated by the National Conference of Commissioners on Uniform State Laws in July 2014. The failure of states to have a comprehensive statutory framework for receiverships was cited as one of the main reasons for the creation of the model act. It is unclear what, if any, traction will be gained on this legislation but for now House Bill 9 provides clarity to the fast growing and effective strategy for dealing with distressed assets which is the world of Ohio receiverships. H.B. No. 9 was supported by the Ohio State Bar Association and the Ohio Judicial Conference – a debt of gratitude is owed to the tireless efforts of the lawyers and judges involved. A special thanks is also due to the lawyer/legislators that shepherded the legislation through the Legislature — Senator Bill Coley and Representative Peter Stautberg. Debbeler is the chair of the financial institutions industry group and Argo is the co-chair of the special assets resolution practice group at Graydon Head & Ritchey LLP. Argo was counsel on the Park National Bank v. Cattani case. 1 Park National Bank v. Cattani, 187 Ohio App.3d 186, 2010. 2 See Huntington National Bank v. Motel 4 BAPS, Inc., 8th District 2010.