Ohio Foreclosure Proceedings Roadmap - Part II: From Complaint to Sheriff's Sale
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.
