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

Are we there yet?  Anyone who has ever been involved in a transactional deal of any complexity has udoubtedly at least thought, if not uttered, this well worn phrase in frustration as yet another obstacle arises to the successful completion of the contemplated transaction.   

Even sophisticated clients are sometimes frustrated by how long it seems to take lawyers to "close" and complete a transaction.  Clients with less experience can become positively apoletic about the fact that it takes more than a week or so for the lawyers to declare the deal done and finished.  Frankly, as one of the lawyers at the center of these trabsactions, I too am occasionally surprised how long it can take in certain situations to successfully complete the transactions.

So why does it take so long, and perhaps more importantly, how can everyone in the deal know how close we are to being able to answer yes to the perennial question "are we there yet?  One of the best tools to understand both what's involved in getting a particular transaction completed AND, on a real time basis what's left to do is a CLOSING LIST.  Every transactional attorney uses some variation of a Closing List to keep track of which tasks and items have been completed, which are still in process, and which issues and tasks still need to be addressed. 

A Closing List for a loan transaction  (Click here and  here  and here for examples) necessarily differs somewhat from a Closing list for a purchase/sale of a business or other transaction (click here and here for examples), both share the same basic elements and utility.  When I do my Closing List, I always start by putting the contact information for all the parties and their attorneys and other important agents and representatives at the top of the first page.  This way I'm never searching for a phone number or e-mail at a crucial point in negotiations.  

The rest of the Closing List is generally in the format of a table.  My tables have visible grid  lines so I can easily see each discrete item or task.  I usually have five columns: 

• Item Number (for quick reference and efficient organization of various folders pertaining to the deal)
• Name of Item or Task (for obvious reasons)
• Responsibility (i.e. which party is primarily responsible for preparing the documentation or completing the task) 
• Status (entries in this column are constantly changing as progress occurs)
• Comment (for additional useful information such as actual or potential obstacles to be resolved, other contact people, etc,)  

Because every deal is different, most closing lists are organic instruments which begin with certain basic items and tasks common to that sort of particular transaction and then initally grow longer as the unique aspects of the deal at hand become fleshed out.  Like other transactional attorneys, building out the Closing List helps me organize what needs to be done and the order in which tasks and items should be attacked.

I usually wait to give clients a copy of the Closing List until I am fairly certain it is a reasonably complete reflection of what will be entailed to make the contemplated transaction a reality in a manner that properly protects my client.  After circulating the intial Closing List, I try to provide updated revised Closing Lists on a regular basis which show where progress has been made and where we may have run into a roadblock or detour that may delay completion of the transaction. 

My hope and intention is that sharing these updated Closing Lists will allow clients to have as close to the same understanding as I do about "where we are" as far as getting the deal done and why we're not there yet.   Thus, if your attorney gives you something of this nature, don't just put it aside and assume it has no purpose relevant to you.  It's your best guide to what's been done so far to bring the deal to fruition and what still remians to make it a reality.   

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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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