Reprinted
with permission from author Christopher D. Caspary, Staff Attorney, Cuyahoga
County Court of Common Pleas.
(This article was originally printed in the
September 2015 Cleveland Metropolitan Bar Journal)
Introduction
The last time the Ohio Assembly
modified Ohio Revised Code (“R.C.”) §2735, Dwight D. Eisenhower was President,
a gallon of gasoline cost twenty cents, and Mickey Mantle was in his third
season as the starting centerfielder of the New York Yankees.
Moving beyond mere facilitation of judgment
collection, the receivership remedy has evolved into a common, expedient, and generally
cost-effective means to effectuate a defunct company’s dissolution or resolve
ongoing issues within an insolvent organization. Due to these developments,
R.C. §2735, the cornerstone of Ohio receivership law, was in drastic need of
revision and expansion.
Due to a patch-work of court decisions
addressing issues that were not covered by statute or existing precedent, certain
crucial aspects of receivership law were subject to conflicting interpretations.
A statutory framework was needed to help standardize results in receivership
actions. The current amendment to R.C. §2735 in House Bill 9 (“H.B. 9”) codifies
certain best practices that are familiar in Cuyahoga County without restraining
the court’s ability to appropriately tailor relief and receivership orders.
The Law
H.B. 9 was enacted December 19, 2014
and has an effective date of March 23, 2015. Though the changes present in H.B.
9 are extensive, the legislature did not modify R.C. §2735.03 (Oath and Bond),
R.C. §2735.05 (Examination), or R.C. §2735.06 (Investment of Funds by
Receiver).
Key Changes to R.C. §2735
·
R.C. §2735.01(C) expounds upon §2735.01(A)(6),
which combine to specify that receivers “may be appointed to manage all the
affairs” of the applicable business entity.
·
R.C. §2735.04(B) codifies
substantive powers of the receiver such as entering into lease or sale contracts
that do not impact lien priority, executing construction contracts, and conveying
real or personal property. The subsection also authorizes the commonplace
practice of opening a deposit account.
·
R.C. §2735.04(C) codifies and
potentially expands upon existing case law on lien priority for receiver fees
and expenses. See, e.g., Dir. of Trans. of
Ohio v. Eastlake Land Dev. Co., 177 Ohio App. 3d 379, 388-389, 2008-Ohio-3013,
894 N.E.2d 1255 (8th Dist.) (allowing expenses from a mortgage sale to extinguish
receivership fees with mortgagee acquiescence and full participation in the
matter); see also, Ohio v. Tokmenko,
112 Ohio App. 42, 43, 165 N.E2d 804 (8th Dist. 1960) (noting that receivership
expenses are generally payable out of the “corpus of the property”); but see, Wilkens v. Boken, Inc., 8th Dist. Cuyahoga No. 64230, 1993 Ohio
App. LEXIS 6202, ¶ 16-19 (Dec. 23, 1993) (requiring that “unusual or
substantial” expenditures provide notice, an opportunity to be head, and receive
eventual court approval).
·
R.C. §2735.04(D) definitively
establishes a comprehensive procedure allowing a receiver to dispose of real
property.
·
R.C. §2735.04(D)(1)(a) and §2735.04(D)(3)
codify existing case law on a receiver’s ability to sell property “free and
clear of liens” (with limited exceptions). See
Huntington Nat’l Bank v. Motel 4 BAPS, Inc., 191 Ohio App. 3d 90, 94-95,
2010-Ohio-5792, 944 N.E.2d 1210 (8th Dist.).
·
R.C. §2735.04(D)(1)(b)-(c) allows
the court to order the receiver to provide evidence of the value of the property
or solicit and consider additional offers prior to executing a conveyance.
·
R.C. §2735.04(D)(2) sets forth
specific procedures that must occur before a receiver can dispose of real
property. This subsection specifically requires that the receiver file a motion
with the court regardless of whether a specific offer to purchase has been
received and provide at least ten-day written notice to all interested parties
(defined in the Statute). If an objection is filed, a hearing must take place that
allows all parties to be heard. Finally, an order of sale must be issued by the
court.
·
R.C. §2735.04(D)(7) requires that
the court create a redemption deadline allowing a party to act and void the
sale. This period cannot be shorter than three days.
·
R.C. §2735.04(D)(10) requires
that the receiver file and serve a certificate of sale and report that outlines
important transactional details for property conveyance conducted under the
auspices of R.C. §2735.04(D)(2)(a)(ii), which governs sales with a specific offer
to purchase the real property in question. This allows a receiver to avoid
having to obtain court approval for a contract sale twice.
Observations and Challenges Moving
Forward
·
Receivership case
law in Ohio remains dynamic and growing, yet at times, incomplete.
·
The most
substantial amendment found in H.B. 9 addresses the disposition of real
property by a receiver and the ability to do so “free and clear of liens.” Property
rights can be difficult to protect in the current bad asset environment, where title
reports are complicated, lengthy, and at times inaccurate.
·
R.C.
§2735.04(D)(2)(b) sets forth notice requirements that must be met before a
receiver can dispose of real property. The statute notes that either a
preliminary judicial report or a title commitment is acceptable for determining
the parties that must be noticed.
·
Case law
interpreting the changes present in H.B. 9 will take time to fully develop. Although
the amendment codifies important receivership precedent, certain gap-filling
decisions were not specifically addressed by the General Assembly, and their
continued applicability may be in question. For example, though R.C.
§2735.04(C) empowers the court to “require an additional deposit” (to be
deposited by the requesting or consenting parties) “to cover funds” that will
be expensed pursuant to a R.C. §2735.04(B)(4) contract, the Statute does not
specifically address whether a court can require the original movant (or
acquiescing and full participating party) to cover all receivership costs not
extinguished by the receivership estate.
·
R.C. §2735.02
adds language that a court should afford “priority consideration…to any of the
qualified persons nominated by the party seeking the receivership,” but
cautions that “[n]o nomination of qualified persons for the receivership is
binding upon the court.” Though the Statute is clear that the court retains
ultimate discretion in deciding who to appoint, the law now views receiver
nominations by the movant favorably.
·
Whether courts,
in interpreting R.C. §2735.04(C), will maintain the aforementioned “unusual or
substantial” standard for expense authorization and priority despite such a
distinction not being present in the Statute.
Conclusion
The amendment of R.C. §2735.01 et seq. provides needed statutory guidance and predictability to
the receivership environment and is a
net positive for receivership practitioners as the lack of predictability in receivership
orders was one of the largest disadvantages when utilizing state court
remedies. The amendment specifically codifies certain receivership powers that
have become commonplace in many jurisdictions, such as disposing of real
property “free and clear of liens,” scheduling hearings and allowing an
opportunity to be heard before entering certain receivership orders, and
creating a blanket rule of receivership fee and administrative expense priority.
H.B. 9 does not inhibit the ability
of the court to tailor the order appointing a receiver to the specific facts of
the matter at hand and allows the receivership remedy to continue to be an
important, powerful, and flexible resource available for attorneys in bad asset
liquidation or business salvage environments. Mickey Mantle would be proud; the
General Assembly has just hit a homerun.
Disclaimer: The contents
of this article are not intended to serve as legal advice. Appropriate legal counseling
or other professional consultation should be obtained prior to undertaking any course
of action related to the topics explored by this article.
Christopher
D. Caspary serves as the Staff Attorney to Judge Nancy A. Fuerst in the
Cuyahoga County Court of Common Pleas. Mr. Caspary completed his undergraduate
studies at The Ohio State University and received his JD/MBA from Cleveland
State University. Mr. Caspary has an interest in the diverse area of business
law.
