Ohio Practical Business Law : Columbus Ohio Business Lawyer & Attorney : Teri Rasmussen : Plunkett Cooney Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

One of the questions I get asked a lot by my bank and creditor clients is "how long?"  How long til we can get the property back?  And those on the unfortunate receiving end of a foreclosure have the same sort of question - how long til I have to move out? - for different reasons.  Of course the answer is that it depends on so many different things and varies considerably from one county to the nextand one case to the next.  But that's not really the sort of answer anyone can run a bank on or make personal decisions with.  So here are some slightly more specific FAQ  

     1.     How long can I stay in my home if it is in foreclosure? 

If your residence is in foreclosure, it still belongs to you until the time it is sold at sheriff's sale and a confirmation entry is entered by the Court.  So, in plain language, the house is still yours until it is sold at sheriff's sale.  At that time, title to the property passes to the successful purcahser at the Sherriff's sale.  However, it will typically be at least a few more weeks (maybe even two or three months) as a practical matter before the confirmation entry is entered by the Court and the successful purchaser at the sheriff's sale receives the deed.  Because foreclosures are taking so long, in "real life", we are probably talking a year or more.

Double-edged sword is that you ARE still the owner as far as taking care of property......  Soooo,,. if you were thinking about just walking away from the whole mess because you're so far underwater equity-wise, it may not be quite that simple.  For a brief summary of the consequenses ogf this approach, visit Connie Carr's post entitled Mortgage Debt: The Consequences of Walking Away over at the Ohio Real Estate Blog.

     2.      How long will the foreclosure take? 

Talk about impossible questions to answer!  I like to start with the absolute MINIMUMS as far as time periods required if everything went exactly perfectly and there were absolutely positively no delays whatsoever.   Here's what has to happen to at least get to the point of getting a Decree in Foreclosure.  

• Defendants must actually be "served" with the foreclosure Complaint, i.e. they must either actually receive a copy of the Complaint or be deemed served through "publication by service" which means that it's been advertised in those tiny print LEGAL NOTICES part of a local newspaper.  Figure probably a week or two if no problems arise.
• Once "served", under Ohio law, a defendant has twenty-eight (28) days to respond to the Complaint.  So, OK, figure another month here.
• If the defendant does not respond after being served, the plaintiff lender can seek a "default" judgment.  To do this, the plaintiff lender must file a Motion for Default with the Court and wait for the Court to enter the Default Judgment.  This is obviously a HUGE wild card.  Some judges may enter judgment right away while others may just let things sit on their desk for months.  And there's really not all that much the plaintiff lender can do to move things along.  Let's just pencil in a couple of months here as being a not unreasonable period of time for this to happen, but with the understanding that this might well be much longer.
• If, on the other hand, a defendant does respond by filing an Answer to the foreclosure Complaint or there are other complications, the plaintiff lender will need to file a Motion for Summary Judgment.  A Motion for Summary Judgment is similar to a Motion for Default Judgment, but will need to address any arguments brought up by any defendants.  In addition, an Affidavit by an officer of the plaintiff lender will probably also be included setting forth the amount owed and explaining other relevant facts.  Once the Motion for Summary Judgment is filed, defendants have fourteen (14) days to respond and customarily, the plaintiff lender will have an additional seven (7) days to file a responsive Reply.  Here again, it's up to the judge as to when a decree in foreclosure will be entered and there really isn't that much a lender can do to hurry things up.  So, OK, figure 2-6 months here (although I will tell you that I currently have at least one case in which the Motion for Summary Judgment has been pending for more than a year)    

So, to recap, to get from the point the foreclosure Complaint is filed to actually having a judgment Decree in Foreclosure, it's going to be AT LEAST 3 1/2 months or so, and THAT IS SUPER OPTIMISTIC!!!  More likely, you are really looking at six to seven months or more and even that assumes that everything goes perfectly.  My anecdotal expereince is whether commercial or residential, a year or more is NOT an unusual amount of time for a foreclosure to take right now just to get to judgment, even if there is no spirited defense.

     3.     So the case FINALLY has reached that Judgment Decree in Foreclosure stage!  NOW how long til it finally gets auctioned at Sheriff's sale? 

Short answer: one heckuva lot longer than you might expect.  Again, I like to go with what i know to be the MINIMUM periods of time required and work out from there.  Here's what has to happen at this point:

• First off, under Ohio law, the property MUST be appraised by appraisers working for sheriff's office.  This is because, under Ohio law, the opening bid  at sheriff's sale for the proerty MUST be at least TWO-THIRDS of this appraised value.  How long this takes will depend A LOT on what county the case is in.  However, in general, let's figure about a month here.        
• Once the appraisal is done, the Sheriff's Office must set the date on which the property will be offered for sale.  This is where, as a practical matter, things really SLOOOW down.  As a practical matter, this is taking MONTHS right now.  By way of example, Franklin County currently already has sheriff's sales already scheduled through March.  In other words, right now, this step is taking 3 months or more.
• Once the sale date is set, it must be advertised for at least three consecutive weeks.  If there is a silver lining anywhere, it's here where the advertising can take place during the waiting period between the time the sale is set and when it actually occurs.  Also, unlike some surrounding states such as indiana, typically most Ohio counties have sales on a weekly basis.    
• If the sale is cancelled for any reason,even if it was something like a blizzard, the property must be readvertised.  There is no such thing as "postponing" a shriff's sale without the necessity of having to readvertise the property.  However, a new appraisal is not required.

So, to recap here, we're probably talking 3-4 months AT BEST!!!!

    4.     The Sheriff's sale has happened!!!! When do I get $$$?  When do I get the property??? 

OK, here the "good news" is that in Ohio - unlike certain other states -- the "equity of redemption" ends when the hammer falls at sheriff's sale and the Confirmation Entry gets entered by the Court.   The exact process will probably vary from one county to the next.  (On its website, the Franklin County, Ohio Sheriff's Office has helpfully posted an overall summary of its procedures following sale as well as an even  more specific  "What You need to Know as a Potential Third-Party Purchaser"  For other counties, visit the Buckeye State Sheriffs' Association website.)  In general, here's the process: 

• Once the sheriff's sale is over, the confirmation entry is to be submitted within 30 days after the sale,
• Once the Order of Confirmation has been entered, the plaintiff's attorney is to submit the deed to the Sheriff's Office within seven (7) days thereafter
• The successful bidder generally has thirty (30) days following entry of the Order of Confirmation to pay the purchase price to the Sheriff's office, although the precise amount of time will be set forth in the Order of Sale.
• The Sheriff is supposed to record the deed within fourteen (14) days of payment, but that doesn't always happen.  Once the deed is recorded, it will be sent to the successful bidder. 
• The proceeds will be distributed as described in the order of Confirmation after the purchase price has been paid in.

So you're looking at another two or three months here.

     5.     Can I get control of the property sooner by getting a receiver appointed and how long will that take?

Yes, maybe. Appointment of receiver generally only makes sense in the context of commercial properties.  Most  commercial mortgages provide for the appointment of a receiver and especially if there are defaults other than  nonpayment, appointment of a receiver should not be especially difficult.  It is possible in certain cases to obtain appointment  of a receiver on an expedited basis, but the timing and the identity of the individual appointed is still a matter of discretion with the court.  Once the receiver is appointed, the receiver can collect the rents,  handle maintenance issues, and interface with tenants.  However, in non-emergency situations, it is sometimes difficult to obtain a quick hearing date on the Motion to appoint a receiver.  

    6.     What about a "deed in lieu"?  Can that speed things up?

Yes, it can.  However, a "deed in lieu" in which the borrower conveys the property over to the lender, usually in exchange for a release or limitation of liability, only really works if (A) the borrower wants to to do this; and (B) there are no other liens on the property.  If those two criteria are met, a deed in lieu (DIL in the biz) can happen very quickly, perhaps even in a month or less.    

     7.     So the bottom line is.....?

Any way you look at it, foreclosure in Ohio is a long process for either residential or commercial property.  Think at least a year before the property is auctioned at Sheriff's sale and another couple of months before it's finalluy done.  In a commercial foreclosure, getting a receiver appointed early in the case can make the long wait far more palatable to the foreclosing lender as it gives the lender control over the income being produced by the property.

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I'm finishing up my recent series of posts on cognovit notes and judgments with a summary of the key things to know about cognovit notes and judgments in Ohio.   

     1.  Shortcut to Judgment.  Cognovit notes provide a shortcut to judgment, allowing a creditor to take a judgment immediately (and I mean within MINUTES) of the filing of the Complaint.  No advance notice to the debtor required.  For more information on how this works, visit my Cognovit Promissory Notes Explained post.

     2.   Few States Allow.  Ohio is one of only a handful of states permitting cognovit judgmentsnat all. In fact, as far as I know, they are only enforceable in OHIO, Pennsylvaina, Maryland, Virginia and Delaware.  Visit An Examination of Confession of Judgment Statutes in the Mid-Atlantic States  for a very concise and specific summary of what is required in each of these states for a valid cognovit note.  In Indiana, it's even a Class B misdemeanor (punishable by a $1,000 fine or 180 days imprisonment)  to include cognovit language in a promissory note or to try to enforce a cog taken somewhere else like, say, Ohio. Indiana Code 34-54-4-1  

     3.  Commercial Deals ONLY.  Cognovit notes are valid ONLY in commercial transactions involving businesses and are not enforceable with respect to consumer obligations.   Ohio Rev. Code 2323(E).  

>>>>>>      The rest of these points pertain ONLY with respect to Ohio cogs.  

     4.   Follow the Statute.   DO NOT VARY IN ANY WAY WHATSOEVER THE LANGUAGE OF THE STATUTORY COGNOVIT WARNING.  The cognovit warning  should appear IMMEDIATELY (and I mean WITHOUT ANYTHING IN BETWEEN)  above(preferably) or below the signature line and should look EXACTLY like this for best results:

WARNING – BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.  IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU RGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE.   

     5.  Confession of Judgment Must Also Be included.  Do not forget to include the enabling language authorizing confession of judgment within the body of the promissory note, guaranty or other instrument.  If the enabling language is not included, the instrument will still be enforceable but will not be any good for taking a cognovit judgment.  Klosterman v. Turnkey-Ohio, L.L.C., 2009-Ohio-2508 (10th App. Dist.).   The statute does not specify the exact language to be used, but over time certain language has customarily come to be used in virtually every Ohio commercial note or guaranty.

      6.  Enforceable Where Signed or Where Maker Located. Cognovit judgments must be taken in (A) the County in which the cognovit note was signed; OR (B) the County in which the individual resides or the business has its principal office.  Ohio Rev. Code 2323.13(A)

     7.   Not Required to Use Business Courts.  At least for now, the existence of commercial law dockets/business courts does not require cognovit judgments to be taken by a judge of that docket  GLIC Real Estate Holding, L.L.C. v. 2014 Baltimore-Reynoldsburg Road, L.L.C., 906 N.E.2d 517, 2009-Ohio-2129 (Common Pleas-Franklin Cty)

     8.  Signing Cog Doesn't Create Attorney-Client Relationship.  No attorney client relationship is established when an Ohio attorney signs a cognovit answer on behalf of a defendant.  It is simply a ministerial act and does not subject the attorney signing the answer to any claim of unethcialconduct..  Opinion 93-3 Ohio Supreme Court Board of Commisioners on Greivancxes and Discipline,  Dibenetto v. Miller, 180 Ohio App.3d 69, 2008-Ohio-6506 (1st App. Dist.).

     9. Copies May Do.  While many Ohio courts may require or at least expect the original promissory note containing the cognovit provision to be produced, the statute does permit use of a copy.  Ohio Rev. Code 2323.13(A).  Good luck with that one - call me when you're able to get the judgment without showing the original of the note to  the judge.

       10.    Getting a Do-Over.  It does not take as much to open up a cognovit judgment thorugh a Rule 60(B) motion as it does with rexpect to other judgments.  However, you have to at least show that a meritorious defense exists, at least in theory.  Visit my previous post What It Takes to Open Up a Cog Judgment to find out more details.

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When I hear the word "indulgences", my mind immediately goes to something "sinful" and well, probably fun.  In this case, however, I'm talking about  that ubiquitous provision found in loan documents designed to allow lenders to continue to hold borrowers and gurantors liabile notwithstanding the lender's failure or inability to abide by the letter of the loan documents or to exercise all or some subset of its rights upon default in a manner saitsfactory (usually with the benefit of 20-20 hindsight) to the borrower and/or gurantor.  Does this stuff really worK?   

Suppose you have this deliquent borrower -  let's call him "B"  -- on a promissory note (though it could be any obligation) and collateral not worth enough to pay you off in full.  But then you also have this guarantor -- let's call him "G".  Somewhere along the line one of your folks messed up in that "commercial reasonable sale" thing that's supposed to happen when you repossess and liquidate collateral.  Or maybe you let a financial covenant default here and there pass for the time being.  Or perhaps you just extended the maturity date or went interest only for B for a while.  Question is whether you're still OK because you can hold G - who does have assets - liable for the obligation.

Most, if not all, bankers and their counsel would say "yes" because both the UCC and our loan docs say we can.  Which is why  Huntington National Bank v. Wallace, 2009 WL 2023891 (N.D. Ohio 2009) -- now on appeal to the Sixth Circuit and the subject of my last post -- is an important case to watch. 

In a nutshell, the Bank had allowed advances to the Borrower to fund draws on letters of credit in excess of a  "maximum amount" specified in the loan documents and the Bank was pursuing one of the guarantors,  Bank took cognovit judgment and guarantor sought relief from judgment   Federal district court held that the indulgence clause was not sufficient to preclude relief from judgment.

Initially, as a lender-oriented attorney, the case concerned me. It seemed to suggest that lenders permitting any sort of modification -- other than the most vanilla extension of time sort --would now be accepting a substantially greater risk that such forbearance would relieve any guarantor not explicitly consenting from liability. In addition, the manner in which it brushed aside the waivers contained in the “indulgence” clause as inapplicable sent a cold shiver down my spine.   And the logic of the ruling would be applicable not just to cognovit notes, but really any sort of obligation.  So, taken as a whole, if upheld by the Sixth Circuit, the decision seemed likely to convince many lenders that it simply was not in their best interests to work with delinquent borrowers.

As I've thought about it more, however, I've begun to think this decision makes more sense and is less alarming than I had first surmised.  The decision in fact makes an important distinction between the nature and extent of the obligation intended by the parties to be guaranteed on the one hand and mistakes and errors made by the lender in enforcing the guaranty on the other.  In this particular case, the guaranty was never intended to be unlimited - there was a clearly stated unambiguous cap on the amount of credit to be extended to the borrower at particular times.  In continuing to permit advances to fund letter of credit draws, the Bank exceeded this previously agreed limitation on the amount for which the guarantor had accepted responsibility for seeing was paid.

When read closely, the language itself – and certainly the concept originally underlying inclusion of such a clause – is about the consequences of the Bank’s inaction or failure to take appropriate steps to ensure the obligation guaranteed could be satisfied from sources other than the guarantor. When viewed from this perspective, the decision leaves largely intact a lender’s ability to rely on indulgence clauses with respect to events and actions occurring during the course of a workout situation.  It is only a lender’s decision to continue extending credit to the borrower beyond an explicitly agreed–upon point that becomes a problem.

Granted, the ruling is still worrisome.  In asset-based lending, a lender may unknowingly extend credit beyond the “availability” permitted pursuant to a borrowing base calculation formula.  And in the Wallace case, the Bank was obligated to honor letters of credit previously issued and really did not have the ability to refuse to make further advances.

What also makes things a bit problematic for me in this case is that the “cap” in question was only for a very short, almost temporary, period of time and was substantially less than it was at other times.  Had the events occurred but a couple of months earlier or later, the cap would not have come into play.

For me, the take-away lessons for now from this case are:

•  If at all possible, obtain guarantor consent to any modifications or waivers at the time the modifications are made or waivers given.  I already do this anyway, but now it will be even more important.
•  If a lender wants the guaranty to truly be unlimited and/or cover over-advances, the guaranty should say so very explicitly.
• Problems arising due to lack of perfection, release of collateral or other obligors, or other events and circumstances connected with an aspect of the lending relationship that do not pertain to the amount advanced are probably still within the protection of indulgence clauses.   

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How would Peanuts’ Linus manage without his trusty security blanket? Depending on the result, the Sixth Circuit reaches in a recently appealed cognovit judgment case, financial institutions such as banks and others relying on cognovit notes, and perhaps ordinary promissory notes as well, may well have to face a similar question.

Every guaranty I’ve seen has some variation of what is sometimes called an “indulgence” clause. These provisions essentially say that a guaranty remains in effect even if the Bank waives a default by the primary obligor or errs in its collection efforts. Now a federal district court, applying Ohio law, has snatched this security blanket away, saying that such a clause does not allow the lender to ignore the credit terms of a loan with impunity. 

In Huntington National Bank v. Wallace, 2009 WL 2023891 (N.D. Ohio 2009) (Case No.09CV408, Carr, J.), decided August 19, 2009, the defendant guarantor alleged he had a meritorious defense justifying vacation of the cognovit judgment taken against him. His argument was that because the Bank made a “material alteration” to the terms of his guaranty by continuing to allow advances even though the amount outstanding exceeded the prescribed “maximum amount”, his guaranty obligation was rendered invalid. 

The Bank has now appealed the case to the Sixth Circuit (Case No. 09-4172).  If upheld, the decision may have far reaching consequences beyond cognovit notes.  The district court decision suggests that the ONLY modification to an obligation that a lender may comfortably do is an extension of time unless the guarantor agrees.  It could also be taken as meaning that even if the guarntor consents, such modifications would release the guarantor of all liability

Factual Background

The underlying fact scenario is a common one. In August 2007, a company known as Bellepointe entered into a First Amended and Restated Loan and Security Agreement “Loan Agreement”) with the Bank. The Loan Agreement governed three separate obligations – a term note, a line of credit, and a “Guidance Line” involving draws on letters of credit. Michael Wallace (“Wallace”), the father of the company’s owner, executed a guaranty of Bellepointe’s indebtedness to the Bank; the son also executed a guaranty, but the case pertains only to the father’s guaranty.

The guaranty excluded any liability for the term loan indebtedness and also capped the maximum amount of liability with respect to the Line of Credit. The crux of the case focused on the proper interpretation of certain language found in the Loan Agreement and the Guidance Line cognovit note, to wit: 

Notwithstanding anything to the contrary contained herein, the maximum amount available under the Guidance Line shall be as follows:

from the date hereof through and including 11/30/07 - $865,000

12/1/07 through and including 12/31/07 - $250,000

1/1/08 and thereafter - $550,000      

These provisions obviously required a substantial reduction in the amount outstanding as of December 1, 2007. It is not altogether uncommon for lines of credit to require a substantial reduction in the amount outstanding at least once a year. 

Procedural History

Procedurally, the case is a bit complicated. Apparently there was some discussion back and forth between Wallace and the Bank concerning his liability prior to any lawsuit being filed. When those talks broke down, Wallace filed a declaratory judgment action in the Southern District of Ohio federal district court against the Bank on February 11, 2009. Two days later, the Bank took a cognovit judgment against Wallace in Lucas County Common Pleas Court. The Bank said it had no knowledge of the declaratory judgment action when it took the cognovit judgment. 

Wallace promptly removed the state court cognovit judgment action to federal district court for the Northern District of Ohio, apparently on diversity grounds that he was a resident of Florida, and sought relief from judgment. After the Northern District federal court granted the motion to vacate the cognovit judgment, the Bank appealed to the Sixth Circuit where the case is now pending. It appears likely that the Southern District declaratory judgment action will be consolidated with the pending Northern District cognovit action.

The Decision 

Wallace alleged that the Bank continued to make advances on the Guidance Line in December 2007 even though Bellepointe had failed to reduce the amount outstanding as required.  Consequently, he contended that the Bank’s actions caused a “material alteration” in the nature of his guaranty obligation, thereby relieving him of liability under his guaranty. The Bank did not dispute that the advannces exceeded the "maximum amount."  However,it countered by pointing out that its loan documents had one of those “indulgence clauses” which stated:

Guarantor hereby promises that if one or more of the Obligations are not paid promptly when due, he will pay the Obligations to Bank, irrespective of any action or lack of action on the Bank's part in connection with the acquisition, perfection, possession, enforcement or disposition of any or all Obligations....   Guarantor agrees that no extension of time, whether one or more, nor any other indulgence granted to [sic] Bank by [sic] Debtor, or to any other gurantor, or any of them, and no omission or delay on Bank's part in exercising the right against, or in taking any action to collect from or pursue Bank's remedies against Debtor or any other guarantor, or any of them, will release, discharge or modify the duties of guarantor hereunder.

In addition, the Bank insisted that it was obligated to pay the draws on outstanding letters of credit in any event and that the definition of “advances” used in the line of credit differed from the definition of “maximum amount available” for precisely this reason. It also argued that the “indulgence” provisions in Wallace’s guaranty allowed it to ignore Bellepointe’s default in any event.  

So what happened? The federal district court agreed that the provisions of the loan documents did allow the Bank to continue making advances in December 2007. However, the court also noted that “Wallace’s burden is only to allege a meritorious defense, not to prove that he will prevail.” It went on to say:

Even if Wallace had initially failed to allege sufficient facts to support his defense, he has subsequently submitted an affidavit describing the above referenced facts, Wallace alleged sufficient facts for this court to evaluate whether his defense is meritorious.

And the reason? The Court cited Toland v. Key Bank of Wyoming, 847 P.2d 540 (1993) and Frost National Bank v. Burge, 29 S.W.3d 580 (Tex. App. 2000) for the proposition that “’indulgence’ is limited to extensions of time for payment and contract terms permitting indulgences do not waive suretyship defenses.” That’s it!  Really isn’t any further analysis or discussion. 

What IS interesting and informative are the briefs of the parties filed in the federal distriuct court case.  Leaving out exhibits, but including affidavits,here they are:

• Wallace's Motion to Vacate
• Bank's Responsive Memo in Opposition
• Wallace's Reply
• Bank's Sur-reply

Now I think the district court got this wrong and I’d really have appreciated a little further analysis of the pertinent provisions in the loan documents so I could fully understand the Court’s reasoning.  However, I also think the Sixth Circuit proceedings will be rather interesting to follow in the months ahead for lender attorneys everywhere. I’ll share my thoughts about the decision in more detail in my next post. 

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The Ohio Real Estate Blog recently offered negotiating tips for commercial tenants entitled "40 Ways to Reduce Occupancy Cost/Risk in 2009" (with a hat tip to Greg Schenk of the The Schenk Company, Inc.).  While some of the suggestions (such as limiting guarantees in some respect) seem to fall in the category of "great, if you could get it", most are more realistic.  In general, the tips fall in the following areas:

• Exit Strategies.  Negotiate "kick-out" clauses  which allow early termination by the tenant at least under certain triggering events; more lenient assignment provisions, use shorter lease terms and more renewal options/ as many longer options as possible.

• Negotiation of CAM (Common Area Mantenance) terms.  Base on total rent without offset for vacancies or anchor tenants; eliminate or reduce inclusion of administrative fee; cap management fee (4%-6% is typical); make sure you have right to audit CAM.

• Default Provisions.  Get notice and cure periods; increase grace period for late rent payments and other cure periods; decrease late fees; limit number of events of default

Some others that I particularly liked:

• Eliminate ability of landlord to relcate tenant or make relocation at landlord's expense.
• No percentage rent or at least establlish a break-point before percentage rent commences
• Make sure property's rules and regulations cover potential problems other tenants might create
• Obtain right of first refual with respect to adjacent space or to buy property

 For commercial tenants looking at lease renewal in 2009, Greg Schenk breaks the news that landlords are likely to offer better deals to new tenants than those already in place and offers the following tips:

• Start the renegotiation process early, as much as a year for long term leases.
• Seek out other suitable locations and obtain real viable bids from other prospective landlords.
• Never accept your current landlord's first offer.
• Never reveal your interest in renewing your lease to the landlord or any of its agents, including property managers, maintenance or janitorial personnel.
• Always refer your landlord to your attorney or other professional representative. 

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In my last post, I made some overall observations about Ohio's required judicial foreclosure procedures and explained the initial steps necessary to begin the foreclosure process.  In this post, I will explain what is involved, once the Complaint has been properly filed, in getting the property being foreclosed upon to sheriff's sale

One other caveat about this explanation is that it relates to foreclosures filed in STATE court as opposed to FEDERAL court.  While foreclosures are generally filed in state court, especially when receivership is involved, if diversity jursidiction can be met, foreclosures are now being filed somewhat more often in federal court.  in Ohio, this seems to happen most often in Cuyahoga County where the federal court route is perceived as a faster track option.

STEP THREE - Receivership Detour.  (Less than one day to several weeks after Complaint is filed.)  When commercial investment property is involved such as an office building, apartment complex, or multi-family property, the real property is generating revenues in the form of rental payments from tenants.  Lenders wanting to protect that stream of income and apply it to the defaulted loan will often seek appointment of a receiver to manage the property.  In addition, property securing defaulted loans has often been the subject of deferred maintenance and lenders are frequently concerned about deteriorating value of the property as a result.

Virtually all commercial loan mortgages securing a loan of any size have explicit provisions in them pursuant to which the mortgagor consents in advance to the appointment of a receiver in advance.  The following is a very typical such provision:

If an Event of Default has occurred and is continuing, regardless of the adequacy of Lender’s security, without regard to Borrower’s solvency and without the necessity of giving prior notice (oral or written) to Borrower, Lender may apply to any court having jurisdiction for the appointment of receiver for the Mortgaged Property to take any or all the actions set forth in the preceding sentence. If Lender elects to seek the appointment of a receiver for the Mortgaged Property at any time after an Event of Default has occurred and is continuing, Borrower, by its execution of this instrument, expressly consents to the appointment of such receiver, including the appointment of a receiver ex parte if permitted by applicable law.

Thus, commercial borrowers have by contract usually agreed to the appointment of a receiver in the event of a default. 

If for some reason, the mortgage lacks the requisite language consenting to appointment of a receiver,  Ohio Rev. Code 2735.01 permits appointment of a receiver when:

 A receiver may be appointed by ... the court of common pleas or a judge thereof in his county … in the following cases:            …

(B) In an action by a mortgagee, for the foreclosure of his mortgage and sale of the mortgaged property, when it appears that the mortgaged property is in danger of being lost, removed, or materially injured, or that the condition of the mortgage has not been performed, and the property is probably insufficient to discharge the mortgage debt;

…

(F) In all other cases in which receivers have been appointed by the usages of equity.

Appointment of a receiver is also permissible under common law whenever it will prevent a wasting of assets. 

To expedite appointment of a receiver, a motion seeking appointment of a receiver is usually filed at the same time as the Complaint.  Technically, the identity of a receiver and the terms of his/her appointment are up to the Court, but generally (although this varies considerably from county to county and from judge to judge) the Court will follow the suggestion of the foreclosing creditor.  Once appointed, the party appointed as receiver will have to post a bond in an amount set by the Court.

While appointment of a receiver often makes sense with respect to income producing property, lenders must weigh those benefits against the additional costs associated with receivership such as the premium for a receiver's bond, fees and expenses of the receiver, and additional attorneys' fees.  

STEP FOUR - Obtaining Decree in Foreclosure.  (No less than 6 weeks, generally 16-24 weeks, sometimes much longer.)  Once the Complaint, and any applicable motion for a receiver, is filed, service of process must be obtained upon the defendants just as in any other lawsuit.  Generally, service is first sought by way of certified mail, then by regular ordinary first class U.S. mail, and then, if necessary, by appointment of a special process server or by advertising.  Obtaining good service on all defendants may take as little as a week or several months; generally this process only takes about a week or two.

Twenty-eight (28) days after being served, a defendant must file an answer to the Complaint.  If no answer ot other responsive pleading is filed, a default judgment will be entered against the defendant.  If a senior lienholder fails to answer, their lien can be eliminated without. any payment to the lienholder so it is important not to ignore a foreclosure initiated by another creditor.  If the foreclosure has been commenced by another creditor, a creditor has the option of  either (A) "crossclaiming" by setting forth its own foreclosure claims which can continue even if the first creditor resolves its differences with the delinquent borrower; or (B) simply filing an answer setting forth its interest in the property being foreclosed.

If one or more defendants answer, then a motion for summary judgment must be filed before a decree in  foreclosure can be obtained.  If factual issues exist, a full-blown trial may even be necessary. 

Unless and until a receiver has been appointed, the delinquent mortgagor may remain in possession of the real property throught the pendency of the foreclosure proceeding.

STEP FIVE - Setting a Date for Sheriff's Sale.  (No less than 6 weeks and often much longer.)  After the Court has entered the Decree in Foreclosure, whether by default judgment, grant of a summary judgment motion, or following trial on the merits, a separate Order of Sale must be entered directing the Sheriff to sell the subject property at auction,  Once the Decree in Foreclosure has been obtained, the Order of Sale is a formality and serves as the operational document to put the mechanics of the foreclosure sale procedure in motion.

Pursuant to Ohio Rev. Code 2329.17 and Ohio Rev, Code 2329.18, the Sheriff must obtain an appraisal of the property from three (3) appraisers and file a copy of the appraisals with the Court.  The Sheriff handles the appraisal process on his own without intervention, consultation, or assistance from the foreclosing creditor.  The average of the appraisals establishes a floor below which the property cannot be sold; pursuant to Ohio Rev. Code 2329.20, the required MINIMUM BID is TWO-THIRDS of the APPRAISED VALUE based on the appraisal filed with the Court. 

Before the real property can be sold, Ohio Rev. Code 2329.26  requires that a notice of sale, showing time and place of sale, address of the property,and certain other required information,  must be published in a newspaper of general circulation within the county beginning at least thrity (30) days before the date of sale.  The notice must be published at least once a week, on the same day of the week, for at least three weeks.  All defendants (other than those who failed to respond to the Complaint) must be served with the notice of sale at least seven days before the sale. 

STEP SIX - Selling the Property at Sheriff's Sale.  Once the date of sale has been obtained and proper notice has been sent out, there is little for anyone to do but wait.   While Ohio Rev. Code 2339.272 permits the Sheriff to hold an "open house" at which prospective purchasers may view the property being foreclosed upon, in my experience, that rarely, if ever, happens.  Commercial investment property has typically remained open to the public thoroughout  the foreclosure proceedings so in these cases, perhaps the need for an "open house" is relatively small.  However, in residential foreclosures, the borrower may have moved out and the actual condition of the property may not be readily apparent.   In both cases, the doctrine of caveat emptor, i.e."buyer beware" has never been more applicable.  There are NO warranties about the condition of the property being sold at foreclosure sale, the successful purchaser is buying "AS IS, with all faults". 

And, no, the foreclosing lender will not make arrangements for prospective bidders to get inside to see the property so don't bother even asking!

On the appointed date of sale, the Sheriff holds an auction sale of the property, often quite literally on the steps of the County Courthouse, with bidding beginning at two-thirds of the appraised value as determined by the Sheriff. Thus, if the real property has been appraised at $150,000, it cannot be sold at sheriff's sale for less than $100,000.   If no one is willing to purchase at the required minimum bid, the property will be re-appraised and re-noticed for sale. 

The highest bidder becomes the succcessful purchaser of the property and is awarded ownership of the property free and clear of all liens belonging to defendants named in the forecosure action.   Typically, the successful bidder is required to make an immediate down payment to the Sheriff of at least ten percent of the winning bid with the balance due within a specified time thereafter, usually 15-30 days.  The foreclosing creditor is permitted to bid at the sale and if it is the successful high bidder, it need only pay the amount, if any, by which its successful "credit bid" exceeds the amount owed to te foreclosing creditor.  In addition the successful bidder is permitted to assign its bid to another party on whatever terms are agreeable between it and its assignee upon the filing of approriate pleading to the effect with the Court.

For the sake of comparison, it may be helpful to visit a post on the Calculated Risk blog entitled "Foreclosure Sales and REO for UberNerds" (which contains a further useful link to a website purporting to contain summaries of foreclosure procedures in all 50 states) to see how the Ohio foreclosure sale process differs in several significant ways from that in several other states.

STEP SEVEN - Completing the Foreclosure Sale Process.  (Approximately 4-6 weeks).  Following completion of the foreclosure sale and payment in full of the purchase price by the successful bidder (or bid assignee), a Confirmation Order approving the sale and ordering delivery of the deed to the successful bidder must then be entered by the Court of Common Pleas.

Once the Confirmation Order is entered by the Court, the delinquent mortgagor has no further right of redemption.   Ohio Rev. Code 2923.31 and Ohio Rev. Code 2329.33.  This differs from many other states.  Prior to entry of the Confirmation Order, the mortgagor can redeem the property and in  essence undo the foreclosure sale by paying the amount of the judgment, plus interest on the purchase price at the rate of 8% per annum from the date of deposit.

Again, every foreclosure is different and has its own timetable.  Local procedures vary considerably from county to county in Ohio and from judge to judge.  In addition, unique issues may arise which complicate the process.  However, in general, this is how a typical Ohio foreclosure unfolds when filed in state court.

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When you're part of the Ohio outpost of a Michigan-based law firm, you get asked questions about Ohio law that you're so used to knowing, it sorta surprises you initially... until you stop and realize there's a whole heckuva lot about Michigan law that you don't know.  Anyway, recently I was asked about foreclosure procedure in Ohio and it occurred to me that in the current economic climate, this might be useful information for lots of folks. 

So, here's a two part post laying out a roadmap for a typical Ohio foreclosure.  Part One covers getting from declaring default to bringing foreclosure proceedings into full swing.  Part Two deals with obtaining the judgment decree in foreclosure once the case is filed, selling the property at sheriff's sale, and the adminstrative details involved in completing the process.  

And of course, my disclaimer: Every foreclosure is unique and presents its own problems and challenges so the following description of the process should be seen only as the most general outline and not relied upon as a detailed explanation of how every forclosure will proceed.  

Whether involved in a foreclosure from the creditor side or as the delinquent mortgagor, everyone always wants to know how long it will take.  And the short answer is longer than you might think.  The length of foreclosure proceedings in Ohio varies considerably from one county to the next and of course every case has its own pace,  However, in my experience, Ohio foreclosures rarely, if ever, take any less than at least six months and often take much longer, not infrequently more than a year.

Initial Observations.  In Ohio, foreclosure proceedings work much the same way regardless of whether the property involved is residential, i.e. someone's home, or commercial/investment.  The most significant difference is that a receiver is often appointed in cases involving commercial investment property to protect the value of the property and the flow of income from occupants in the property.  Because my law practice here in Central Ohio primarily involves representation of creditors with liens on commercial or investment properties, this post will focus primarily on how the process works in those situations.  However, most of what is said is equally applicable to the resdential side as well.  

Ohio, unlike many other states, does not offer creditors the option of a nonjudicial foreclosure, strict foreclosure or deed of sale.  (Click here for a very brief explanation of the difference between judicial and nonjudicial foreclosure.)  If a creditor has a mortgage or judgment lien on real property in Ohio and wishes to convert that lien to cash to pay off the borrower's debt, a lawsuit MUST be filed; there is NO summary procedure or shortcut.  The only out of court alternative available is a "deed-in'lieu" situation in which the borrower voluntarily conveys the real property to the creditor in full or partial satisfaction of the outstanding obligation.  (This could and probably will be the subject of a separate post.)

Because Ohio does enforce cognovit promissory notes evidencing commercial obligations which permit creditors to obtain money judgment immediately upon filing a Complaint, creditors are allowed to pursue post-judgment collection actions with respect to a debtor and its personal property assets during the pendency of the foreclosure proceeding if they have taken a cognovit judgment on the underlying monetary obligation.  Perhaps the most important point here is that a creditor can both take a cognovit judgment and pursue foreclosure simultaneously.

The fact that the titled owner of the real property may be a guarantor rather than a borrower does not affect foreclosure proceedings in any meaningful way.  Nor does the fact that the loan agreement, note, or mortgage is a "hypothecated" obligation or contains "exculpatory" provisions, both of which relieve the signatory of liability in excess of the value of the property pledged, change any aspect of the foreclosure proceedings other than eliminate any attempt to obtain money judgment.

While statutes and court rules governing foreclosure are uniform throughout Ohio, several counties have additional supplementary local rules, many of which fall in the "unwritten" variety, that must be followed by the foreclosing creditor.  Several counties, including Cuyahoga (think Cleveland) and Hamilton (think Cincinnati), use magistrates for foreclosure proceedings.  This can add time to the process because Magistrate Decisions must be adopted by Common Pleas judges before becoming effective.

STEP ONE - Establishing the Event of Default.    (Generally 1 -3 weeks, occasionally 4-5 weeks.) Obviously, an event of default, whether monetary or nonmonetary, must first occur before the foreclosure remedy is appropriate.  Typically, upon default, a demand letter of some sort will be sent to the borrower and any guarantors setting out the amount owed and referencing the occurrence of the default.  Nonmonetary default can include many things, a number of which will likely be spelled out in the applicable loan documents, and can include such things as default on obligations to other creditors, decrease or deterioration in the value of the real property, failure to maintain insurance, or filing of a mechanics' lien upon the real property. 

Before commencing a foreclosure action, lenders must take care to comply with any applicable cure period which allows the borrower to bring the obligation current or otherwise correct the default.  Loans guaranteed by the Small Business Administration, or in which the Veterans' Administration or the Federal Housing Administration is involved may have specific notice periods and guidelines that must be observed before foreclosure should be initiated.   

STEP TWO - Preparing and Filing Foreclosure Complaint.  (Typically 1- 3 weeks, depending on the complexity of the title work required; process can occur contemporaneously with STEP ONE.)  To ensure that all creditors with liens on the real property --  including junior or senior mortgageholders, judgment lien holders, mechanics' lien holders, and taxing authorities -- are properly included as defendants in the foreclosure action, a title report must be ordered from a title company.  It is important to include all such lienholders because if omitted, the lien will remain an encumbrance on the real property even following foreclosure sale, and depending on its priority, might even be entitled to recover proceeds from the foreclsoure sale from other recipients. 

Purusant to Ohio Rev Code 2329.191, the title report or preliminary judicial report (sometimes called PJR, for short), must be filed with the Complaint in the Common Pleas Court in the Ohio county in which the real property is located.  The key is WHERE the property is located; it does not matter if the debtor is a  foreign corporation headquartered in, say Delaware, or if the loan documents were all signed in Michigan, or even if the principal place of business of the debtor is in another county or state. 

Defendants named in the complaint MUST include the follwing:

• Original mortgagor (i.e. party granting the mortgage) - note that this may or may not be the principal borrower and that if not, the principal borrower is not required to be named a defendant
• Current owner of the property, if different from the original mortgagor
• Junior or senior lienholders, including mortgage holders, judgment lien holders, statutory lien holders such as mechanics' liens and others
• Spouse of individual debtor (to eliminate dower rights)
• Current tenants and other occupants, whether there pursuant to written lease or not
• Holders of other interests such as easements, if wish to eliminate them

The Complaint may seek only foreclosure or may also include other counts for such causes of action as money judgments against the borrower(s) and guarantor(s), replevin (i.e.personal property foreclosure - yes, this too will likely eventually be the subject of a separate post), or other related claim.  If a lender has determined appointment of a receiver is warranted, the Complaint will also include a count seeking appointment of a receiver and the lender should have selected a preferred receiver appointee before filing the Complaint.

So this is how a typical Ohio foreclosure generally begins.  In my next post, I'll explain what happens once the foreclosure action is filed and how the process culminates in a sheriff's sale conveying good title to the real estate being foreclosed to another party and providing the source of funds to payall or part of the delinquent debt.

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