Ohio Practical Business Lawyer & Attorney : Teri Rasmussen : Lane Alton & Horst Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

The ongoing C.V. Perry receivership case reflects an interesting choice of state law insolvency procedures over federal bankruptcy proceedings. And yet, no doubt in part due to the sparseness of developed case law and statutory authority when it comes to Ohio receivership law, much has been borrowed from federal bankruptcy law.

As a Columbus bankruptcy attorney who often represents creditors, I find the C.V. Perry case quite interesting because the procedures and law that will be established during the course of this case are likely to have an impact for some years to come. If nothing else, Franklin County at least will have a roadmap for others contemplating receivership to follow.

A few months ago I wrote about how the C.V. Perry receivership was representative on what I saw as a mini-trend in choosing state court receivership over federal bankruptcy and some reasons that might be happening. In my last post, I provided more detailed information about the C.V. Perry receivership itself. In this post, I want to discuss some more of the events in the case and how the influence of federal bankruptcy law can be seen.

Proof of Claim Procedure. Although Ohio Rev. Code 1701.89(A) does refer to the "presentation and proof of all claims and demands against the corporation", the actual process to be followed is left rather vague. Moreover, there is no analogous provision in Chapter 1705 of the Ohio Revised Code applicable to limited liability companies. Under federal bankruptcy law, requiring creditors to make a written "proof of claim" is a key component to the administration of any bankruptcy case and Bankruptcy Rule 3002 and Bankruptcy Rule 3003 sets out exactly how and when this should be done.

Injunctive Relief in Form of a "Stay". Count VII of the Complaint seeks unspecified injunctive relief. However, the Amended Order goes further and in language very similar to section 362 of the Bankruptcy Code, provides:

IT IS FURTHER ORDERED that all creditors, claimants, bodies politic, parties in interest, and all sheriffs, marshalls, and other officers, and their respective attorneys, servants, agents, and employees, and all other persons, firms and corporations be, and they hereby are, jointly and severally, enjoined and stayed from commencing or continuing any action at law or suit or proceeding in equity to foreclose any lien or enforce any claim against any of the Movants or their respective property, or against Martin Management, as receiver and liquidating trustee, in any court. All such entities are further stayed from executing or issuing or causing the execution or issuance out of any Court of any writ, process, summons, attachment, subpoena, replevin, execution, or other process for the purpose of impounding or taking possession of or interfering with, or enforcing any claim or lien upon any property owned by or in possession of Martin Management, as receiver and liquidating trustee, and from doing any act or thing whatsoever to interfere with Martin Management, as receiver and liquidating trustee, in the discharge of its duties in this proceeding with the exclusive jurisdiction of this Court over Movants' properties and said receiver and liquidating trustee. This Order shall be in full force and effect as of the date of its journalization with the Clerk of Court.

Creditors have also responded in a fashion similar to what they would do in a bankruptcy proceeding. One even entitled its pleading "Motion for Relief from Stay".

My point here is that ordinarily in cases in which injunctive relief is granted outside bankruptcy, the procedure is somewhat different than what seems to be happening in this case. Typically an interim temporary restraining order is first imposed for a limited period of time followed, generally after some kind of hearing or by agreement of the parties, by a preliminary injunction. Parties wanting the injunction removed usually ask that it be dissolved, not that the "stay" be lifted. Here, there is no indication that any hearing was ever held prior to the issuance of this Order.

What makes the issuance and continuance of that portion of the order appointing the receiver/liquidating trustee particularly interesting is that, as some creditors have pointed out, statutory authority doesn't really support such a blanket imposition of a stay. While Ohio Rev. Code 1701.89(A)(2) does allow the imposition of a "stay of the prosecution of any proceeding against the corporation or involving any of its property", Ohio Rev. Code 1705.45(B)(2) specifically states that "dissolution of a limited liability company does not... prevent the commencement of a proceeding by or against the company in its name..."

"Administrative Priority". One especially interesting concept borrowed from bankruptcy practice is the recognition of "administrative priorty" for certain claims. An intial Borrowing Order entered in late December authorizes the Receiver/Liquidating Trustee to borrow funds or purchase materials up to an aggregate amount of $5 million. It also provides that those extending credit in this way "shall be entitled to administrative priority distribution" for those amounts.

More recently in February, the Receiver/Liquidating Trustee filed a Motion for Authorization to Establish Fund for Administrative Fees, Costs and Operating Expenses which essentially seeks to surcharge creditors with liens on real estate to pay fees for the Receiver/Liquidating Trustee and his counsel, as well as other administrative expenses. Creditors have opposed this latest motion and some have pointed out that in a Chapter 7 bankruptcy proceeding, attorneys' fees and other administrative priority claims are only paid out of the disposition of unencumbered assets.

The concept of "administrative priority" is a bankruptcy one spelled out in section 503 of the Bankruptcy Code. There is no comparable provision in the Ohio Revised Code. Here again, the sparseness of statutory authority and relative staleness of caselaw (most cases cited by any party are more than 50 years old and some date back before 1900) has led to importation of bankruptcy concepts into a state law insolvency proceeding.

The paucity of recent or extensive authority concerning receiverships in Ohio law has been both the advantage and drawback of choosing receivership over the more clearly delineated Chapter 7 bankruptcy proceeding. At the conclusion of the C.V. Perry case, that will no longer be true. As the case proceeds, it will be interesting to see the extent to which bankruptcy concepts and procedures are imported.

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In connection with the downfall of the C.V. Perry homebuilder entities, I have previously posted on the increasing use of receivership in place of bankruptcy. It's been a few months since then and perhaps time for an update, as well as some commentary.

This is the first of a two-part series concerning events in the case itself and some reflections on what it all means. In this post, I want to provide some more detailed information about the case, some of its players, and the context in which it is happening. In Part II, I will explore the influence of federal bankruptcy law in the case.

Parties. First, more info on the basics. The C.V. Perry receivership actually involves multiple related entities, consisting of limited liability companies in which C.V. Perry & Co. was the sole member. In addition to C.V. Perry & Co., the receivership case also includes the judicial administration and winding up of the following entities (collectively, along with C.V. Perry & Co., I'll refer to as "Perry Entities"):

• C.V. Perry Builders, LLC
• C.V. Builders II, LLC
• Manors at Homestead, LLC
• Pointe at Blacklick, LLC
• Manors at CrossCreeks, LLC
• C.V. Land II, LLC
• Arlington Remodeling, LLC

Martin Management Services, Inc., through its principal Reg Martin is the court appointed "Receiver and Liquidating Trustee" (more on what this means below) and is represented by the law firm of Strip, Hoppers, Leithart, McGrath & Terlecky Co., LPA. Judge John F. Bender is presiding.

Following Case Progress. Anyone wanting to follow this case closely can visit the Franklin County Clerk of Court's website and enter Case No. 07MS-11-454 (you don't actually have to enter the "11" as that is simply a notation indicating the case was filed in November) to see the docket showing the pleadings which have been filed. To see copies of pleadings, you can make a personal visit to the Franklin County Clerk of Courts and view them on computer terminals provided there.

Original Complaint. According to the Perry Entities' receivership Complaint, filed November 7, 2007, the impetus for seeking appointment of a receiver/liquidating trustee resulted from such problems as (1) numerous cognovit judgments having been taken against the Perry Entities by The Home Savings and Loan Company of Youngstown; (2) dozens of mechanics' liens filed against Perry Entities; and (3) numerous other lawsuits filed against the Perry Entities. The Complaint for Judicial Administration of Winding Up of Affairs of Voluntarily Dissolved Corporation and Limited Liability Companies has eight counts which are:

• Appointment of Receiver for C.V. Perry; R.C. 1701.89(A)(8)
• Appointment of Liquidating Trustee for the Limited Liability Companies; R.C. 1705.44
• Establishment of Proof of Claims Procedure; R.C. 1701.89(A)(1), 1705.45 and 1705.46
• Settlement or Determination of Claims; R.C. 1701.89(A)(3), 1705.45 and 1705.46
• Determination of Rights of Holders of Shares; 1701.89(A)(4), 1705.45 and 1705.46
• Presentation and Filing of Receiver's and Liquidations Trustee's Account; R.C. 1701.89(A)(5) and 1705.44
• Injuctive Relief; R.C. 1701.89(A)(9) and 1705.44
• Allowance and Payment of Compensation to Receiver, Liquidating Trustee, Attorneys, Accountants, and other Persons; R.C. 1701.89(A)(10) and 1705.44

Order Appointing Receiver and Liquidating Trustee. An initial Order appointing the receiver/liquidating trustee was entered the same day as the Complaint was filed, but an Amended Order Appointing Receiver and Liquidating Trustee was entered on December 5, 2007. The Amended Order granted the relief sought in the Complaint and required the newly appointed Receiver and Liquidating Trustee to post a bond of $100.00 with the Franklin County Clerk of Court.

So why the appointment as Receiver and Liquidating Trustee? Simply put, what statutory authority Ohio has concerning the liquidation and winding up of the affairs of business entities are slightly different with respect to corporations and limited liability companies. Ohio Rev. Code 1701.89, applying to corporations, references appointment of a receiver. Ohio Rev. Code 1705.44, the analogous statute for LLCs, refers to a "liquidating trustee".

Local Rule 93. In addition to these statutes, Franklin County Court of Pleas Common Pleas Court Local Rule 93 (courts elsewhere in Ohio will have their own rules which may differ in important respects from this rule) will govern procedures and events in this case. Among other provisions, Local Rule 93 requires the filing of an initial inventory and appraisal of the assets of the entity placed in receivership by the court appointed receiver within two months of his or her appointment, together with receipts and disbursements received and made to that point. It also restricts a receiver's fees to no more than $75 an hour and caps fees for counsel for a receiver at $150,000 (which may seem like a lot, but in this case may pose a problem for the receiver's counsel).

Events. What's happened so far has mainly been authorization to sell certain properties, establishment of a "proof of claim" procedure, and a fair amount of sparring about "administrative priority". I'll talk about the latter two of these in my next post.

So that's the lay of the land. In Part II, I will focus on the influence of federal bankruptcy law on these receivership proceedings.

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About a week ago, established Central Ohio custom home builder C.V. Perry & Co. was placed in state court receivership to liquidate its assets.  (Case No.07-MS-454 in Franklin County Common Pleas Court, Judge Bender presiding - click here to visit the court's website and see the latest docket.)  C.V. Perry & Co. had been in business for sixty years and had faced increasing financial difficulties following the death of its founder and founder's son in 2004.  Click here to read more about what led up to the company's decision to shut down operations. 

What is most interesting about this development is the choice to utilize relatively vague state court receivership law rather than a more well-defined federal bankruptcy proceeding.  While it's not so prevalent that one could call it a trend yet, more and more often, litigants seem to be choosing state court receivership remedies in Ohio over federal bankruptcy court.  In part, the increasing popularity of receivership may be the result of a perception that it will be less costly and complex than federal bankruptcy -- which I'm not convinced is correct.  However, I think parties are also attracted to the concept that they can define how the receivership will operate in a way not possible in the more structured federal bankruptcy proceeding.

In Ohio, receiverships are governed primarily by the provisions of Ohio Revised Code Chapter 2735 and the local rules of the trial court in which the action is commenced.  In recent years, the primary use of receiverships in Ohio has been in conjunction with a foreclosure of income-producing commercial property by a mortgagee during the pendency of the lawsuit prior to the foreclosure sale.  However, Ohio Revised Code  §2735.01 also permits appointment of a receiver to carry out the terms of a judgment, in cases of corporate insolvency or "in all other cases in which receivers have been appointed by the usages of equity."  In addition, Ohio Revised Code §1701.90 specifically authorizes appointment of a receiver for the winding up of the affairs of a corporation and Ohio Revised Code §1701.91 regarding judicial dissolution of a corporation also contemplates use of a receiver.

Under Ohio law, both the circumstances justifying appointment of a receiver and the powers a receiver will have once appointed remain highly flexible.  While Ohio courts routinely note that appointment of a receiver is an "extraordinary remedy", there also seems to be substantial deference given to a trial court's determination that it is appropriate in particular circumstances.  Aside from relatively sparse case law, the only guidance regarding the scope of an Ohio receiver is found in Ohio Revised Code §2735.04 which states that a receiver "may bring and defend actions in his own name as receiver, take and keep possession of property, receive rents, collect, compound for, and compromise demands, make transfers, and generally do such acts respecting the property as the court authorizes."  Thus, unlike federal bankruptcy court where the rights and obligations of debtor and creditor are fairly clear, in an Ohio receivership action, the outer limits of permissible action by receivers has not yet been established.

Since I began practicing law more than twenty years ago, Ohio receivership law has always been a somewhat uncertain body of law.  In past years, however, that uncertainty seemed to encourage use of federal bankruptcy courts in insolvency situations.  Now, however, that very uncertainty and lack of established rules seems to be attracting both creditors and debtors as if they see receiverships as a "design your own" solution. 

At the same time, however, one can see some influence of bankruptcy law.  Orders appointing receivers now regularly contain "automatic stay" type provisions.  Frequently, a claims determination process similar to the proof of claim requirements in bankruptcy is mandated.  Asset sales are often modeled after the procedures used in bankruptcy court. 

Whether receivership is the answer in any particular case depends upon your role in the situation and what you hope to achieve in an insovency proceeding.  While the relative informality of the state court receivership is alluring, I believe  that in general both debtors, and especially creditors, are better served by participating in federal bankruptcy proceedings. 

For creditors, while I understand the attraction of perhaps being able to get orders from state court judges allowing the creditor all sorts of latitude in dealing with the assets of a debtor, I remain unconvinced that receivership will ultimately be less expensive.  The fact that there ARE established priocedures and responsibilities in a bankruptcy proceeding seem to me more likely to expedite resolution than the situation in state court receivership in which every issue is one in which almost anything could happen.  Moreover, aggreesive collection action seems more likely than receivership to result in available cash flow and assets being directed specifically in the direction of my client.

For debtors wishing to continue in business, state court receivership may actually offer a viable alternative to Chapter 11 proceedings which are indeed quite expensive.  Because Ohio receivership law is so undeveloped, there is an opportunity to choose which aspects of federal bankruptcy law are most beneficial while perhaps avoiding those considered less desirable.  Depending upon how the receiver is selected and the relationship which develops between the receiver and the principals of the debtor, state court may offer real opportunities for resurgence.  However, control over the company's business affairs may just as easily be irretrievably lost due to the sweeping scope of a receiver's powers. 

For debtors intending to liquidate, the advantage of a federal bankruptcy proceeding is that there is established law about what the effect of such a proceeding is. 

If the current trend towards utilizing state court receivership rather than federal bankruptcy court continues, it will be interesting to see how the case law develops concerning the grounds justifying appointment of a receiver and the scope of a receiver's powers once appointed.  

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