On December 19, 2014, the Governor of the State of Ohio signed into law legislation that clarifies and expands the scope of powers given to a receiver under Ohio’s receivership statutes (chapter 2735 of the Ohio Revised Code (“ORC”)).  Most significantly, effective March 23, 2015 (the effective date for all of the amendments), an Ohio receiver will have express statutory power to sell real and personal property free and clear of liens and will be able to sell encumbered real property using a new statutory sale process that expressly supersedes existing foreclosure laws.  The legislation also modifies certain other sections of the Ohio Revised Code involving receivership issues (e.g., attachment proceedings under ORC § 2715) and creates a special Study Committee on Receivership Laws tasked with studying “matters related to receiverships and payment of public utilities.”

The section most impacted by the legislation is ORC  § 2735.04, which provides for the powers of a receiver.  The existing statute identifies only a handful of specific powers followed by a generic catch-all power to “generally do such acts respecting the property as the court authorizes.”  The Ohio Supreme Court has interpreted this statute “as enabling the trial court to exercise its sound judicial discretion to limit or expand a receiver’s powers as it deems appropriate.”

Ohio courts have filled in many of the statutory gaps in terms of specific receivership powers over time.  For example, Ohio courts have authorized the sale of receivership property free and clear of liens even without express statutory authority.  The legislative revisions, however, significantly clarify the scope of receivership powers and provide for express statutory authority for actions previously taken based upon the catch-all language in the existing statute.

Under the revised statute, all powers of a receiver are required to be set forth in the appointment order and can include the power to:

  • Bring and defend actions as receiver;
  • Take and keep possession of real or personal property;
  • Collect rents and other obligations and compromise demands;
  • Enter into contracts, including sale contracts, leases, and, so long as existing lien rights will not be impacted, contracts for construction and for the completion of construction;
  • 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
  • Take any other action authorized by the court.

Funds expended by or on behalf of the receiver in performing any of these powers will be treated as an administrative expense of the action.

A receiver will also have express statutory power, subject to court approval, to sell receivership property free and clear of liens through any means that will maximize value.  In such cases, the court is empowered to require valuation evidence prior to approving the sale, set a floor bid in any auction process, and grant stalking horse protections.

A receiver or first mortgage holder can also utilize a new and more streamlined process for selling encumbered real property without having to comply with existing foreclosure laws under ORC chapter 2329 (subject to two minor exceptions).  The new process can be summarized as folows:

  • The receiver or first mortgage holder applies for authority to sell real property;
  • If an auction process is proposed, the application must describe the proposed procedures;
  • If a private sale is proposed, the application must identify the buyer and summarize the proposed terms;
  • At least 10 days’ written notice of the application and an opportunity for a hearing must be given;
  • If no party objects, the court may proceed without a hearing;
  • The court issues an order approving the auction process or the private sale, as applicable;
  • If the court finds that a sale free and clear of liens is in the best interest of the receivership estate, the court may order the sale free and clear of all liens other than liens of the county treasurer for real estate taxes and assessments;
  • Upon recording the receiver’s deed, all such liens shall be cancelled as to the real property and transferred to the sale proceeds in the same priority as they previously existed;
  • No additional “confirmation order” for the sale is needed except where an auction process was used;
  • The court order approving the private sale or the auction process must establish a reasonable time, not less than three days, after the order is entered for the exercise of an equity of redemption right;
  • During such period, any fee owner may redeem the property by paying the greater of the sale price and an amount equal to all liens that would have been cancelled as a result of the sale;
  • Upon receiving such amount, the receiver must notify the court and set aside the sale;
  • In such case, fee title remains with the owner, but all liens attach to the monies paid to the receiver;
  • Upon closing of the sale, the receiver shall issue a receiver’s deed to the property; and
  • If the sale was through a private sale, the receiver must file a certificate and final report.

Depending on the circumstances, asset sales under the revised receivership statute might be a quicker, cheaper, and more efficient alternative for maximizing the value of a debtor’s assets.  In contrast to sales in chapter 11 cases, for example, there is no creditors’ committee overseeing the process (and no committee professional fees), the requirements for a sale free and clear are less involved than those under  § 363(f) of the Bankruptcy Code, and the time frame for a sale can be as little as ten days, subject, of course, to the court’s approval.  Again, depending on the circumstances, one possible strategy for less complicated businesses might be to sell assets through a quicker and less expensive receiver’s sale and then file for bankruptcy relief with the sale proceeds in hand in order to obtain whatever additional relief might be necessary.

On the other hand, bankruptcy relief provides the all-important automatic stay and numerous powers designed to give the debtor a breathing spell and to maximize value for everyone’s benefit.  An orderly receiver’s sale would not be possible if creditors begin taking action to enforce their rights.  In addition, a receiver’s sale might not be practical for businesses with assets in multiple jurisdictions, as that would entail multiple receivership cases and a cumbersome process.

All of these factors and numerous others must be considered in devising an strategy for responding to distress.  Under the revised receivership statutes, lenders and creditors have the benefit of more clarity and a bit more muscle.