Receiverships have gained in popularity in foreclosure cases and in other types of litigation in recent years. Orders appointing receivers and setting forth the receiver’s duties frequently include a provision allowing the receiver to market and sell real estate. However, the question of whether a receiver legally has the ability to convey title to real estate, free and clear of liens and encumbrances, appears to have been answered in the negative, at least by one appellate district in Ohio.

In 2008, the Eighth District Court of Appeals handed down its decision in the matter of Ohio Director of Transp. v. Eastlake Land Dev. Co., 177 Ohio App.3d 379, 2008-Ohio-3013, 894 N.E.2d 1255. In what appears to be a classic example of bad facts making bad law, the appellate court reversed the lower court’s approval of a receiver’s sale of real property free and clear of liens. In Eastlake, which was not a foreclosure, the court-appointed receiver sought authority to sell a parcel of real estate for the sum of $250,000, an amount which he stated he “believed” was a commercially reasonable price for the property. In connection with the motion, the receiver presented no evidence of his marketing and sale efforts, nor did he present any evidence regarding the value of the property. Notably, the receiver’s motion did not state that he intended to sell the property free and clear of AFF’s liens. The senior lienholder, American First Federal, Inc. (“AFF”) intervened in the case and filed an objection to the receiver’s motion to sell the property for less than what was owed to AFF.

On January 20, 2007, the court issued two, inconsistent orders related to the receiver’s motion. In the first, the court set the receiver’s motion for hearing on February 13, 2007. In the second, the court “inexplicably” granted the receiver’s motion to sell, without vacating the order setting the hearing. In its approval of the motion, the trial court specifically authorized the receiver’s sale free and clear of AFF’s liens. On February 2, 2007, (presumably unaware of the court’s 1/20/07 granting of the sale motion) AFF filed its objection to the receiver’s motion and in that objection (1) submitted a credit bid of $251,000 and (2) offered evidence to the court that the property in question was worth at least $600,000.

In reversing the trial court’s approval of the sale, the court of appeals held that it was error for the lower court to authorize the receiver’s action without AFF’s consent or notice that the property would be sold free and clear of its liens. The trial court’s approval resulted in a denial of AFF’s due process rights. Although, as the court of appeals observes, it found “no Ohio case that holds that the only way to extinguish a lienholder’s interest in a property is through a foreclosure action,” the procedures mandated in a foreclosure (notice, opportunity to be heard, appraisal, public sale) are due process concepts ingrained in all court action.

The holding of Eastlake seems to suggest that so long as due process is not violated, a receiver may be able to sell real property free and clear, over objections by a lienholder, however, in application, this has not been the case.

Recent rulings out of the Cuyahoga County, Ohio Court of Common Pleas have interpreted Eastlake and have extended its reach, leading practitioners to the only reasonable conclusion that a receiver’s sale of real estate (with or without any objection by the property owner or a lienholder) is likely no longer permitted in Cuyahoga County.

In a recent decision in the foreclosure case of Republic Bank v. Flynn Properties, LLC, et al., Case No. CV-05-557338, Judge Carolyn Friedland denied the receiver’s motion to sell commercial real estate free and clear of liens. In that case, the receiver had extensively marketed the property and received multiple purchase offers including two that were for an amount well in excess of the appraised value of the property. The property owner objected to the sale as did the property owner’s attorney who had recorded a mortgage encumbering the property, three years after lis pendens had been effective, in order to secure his legal fees. In denying the receiver’s motion, the court pointed to the objections by the owner and the junior mortgage-holder and the fact that the sale proceeds would not provide enough to pay the junior mortgage. No discussion was had by the court as to the validity of the junior mortgage within the context of lis pendens.

An even broader application of Eastlake can be found in another Cuyahoga County matter, FirstMerit Bank, N.A. v. Rockside Business Center, LLC, et al., Case No. CV-08-647544. Relying on Eastlake, Judge Janet R. Burnside denied a receiver’s motion to sell real estate free and clear. In that case, the motion was denied despite the fact that: (1) the only lienholders other than the plaintiff bank were the county treasurer and Plymouth Park Tax Services, LLC (who had purchased a tax certificate) and those two lienholders were going to be paid in full from the proceeds of the sale and (2) the property owner had been duly noticed of the sale motion and failed to object or respond in any fashion. In addition, all of the entities that had an interest in the property were named in the suit and had made an appearance through counsel. Nevertheless, the court denied the motion and a subsequent motion to vacate, reconsider or amended that judgment. The subject property is currently set for sheriff’s sale.

Until another decision from the Eighth District or the Ohio Supreme Court either changes the ruling of Eastlake or limits its application to the egregious facts presented in that case, receiver sales of real estate in the Eighth District appear to be a thing of the past.