A. THE PROPER COURT
1. Joinder of Parties
4. United States of America
5. State of Ohio
C. LOCAL RULES
D. SERVICE OF PROCESS
1. Types of Service of Process
2. Service by Publication
3. Service on the State of Ohio
4. Service on the United States
1. Default Judgment
2. Summary Judgment
H. THE SALE
2. The Appraisal
4. The Purchase
5. Sheriff’s Deed
6. Invalidation of Sale
K. LIS PENDENS
A. THE PROPER COURT
The court typically chosen by the foreclosing plaintiff of commercial real estate is the Common Pleas Court. Since the bulk of these cases are heard in this court, the Common Pleas Court judges tend to have more expertise in this area. Federal District Court can have subject matter jurisdiction as well. Probate Court and Domestic Relations Court can obtain subject matter jurisdiction where there is an administration of the estate or divorce action involving the owner. Ohio law contains an interesting exception to the rules, establishing that Cleveland municipal courts have subject matter jurisdiction in foreclosure cases, pursuant to R.C. § 1901.18(B)(2):
In all actions for the foreclosure of a mortgage on real property given to secure the payment of money, the enforcement of a specific lien for money or other encumbrance or charge on real property when the amount claimed by the plaintiff does not exceed fifteen thousand dollars and the real property is situated within the territory, and, in those actions, the court may proceed to foreclose all liens and all vested and contingent rights and may proceed to render judgments, and make findings and orders between the parties in the same manner and to the same extent as in like cases in the court of common pleas;
Venue: Commercial Foreclosures can often involve properties in more than one county posing a question of venue.
a. Ohio Civil Rule 3(B)(5) provides for proper venue in the following counties:
A county in which the property, or any part of the property, is situated if the subject of the action is real property or tangible personal property;
b. Ohio Civil Rule 3(F) establishes a method of providing notice of the pending litigation in counties other than the county the foreclosure action is pending. It provides:
When an action affecting the title to or possession of real property or tangible personal property is commenced in a county other then the county in which all of the real property or tangible personal property is situated, the plaintiff shall cause a certified copy of the complaint to be filed with the clerk of the court of common pleas in each county or additional county in which the real property or tangible personal property affected by the action is situated. If the plaintiff fails to file a certified copy of the complaint, third persons will not be charged with notice of the pendency of the action.
To the extent authorized by the laws of the United States, division (F)(1) of this rule also applies to actions, other than proceedings in bankruptcy, affecting title to or possession of real property in this state commenced in a United States District Court whenever the real property is situated wholly or partly in a county other than the county in which the permanent records of the court are kept.
Also see discussion of lis pendens below.
Joinder of Parties
Ohio Civil Rule 19(A) provides in part:
A person who is subject to service of process shall be joined as a party in the action if (1) in his absence complete relief cannot be accorded among those already parties, or (2) he claims an interest relating to the subject of the action and is so situated that the disposition of the action in his absence may (a) as a practical matter impair or impede his ability to protect that interest or (b) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest, or (3) he has an interest relating to the subject of the action as an assignor, assignee, subrogor, or subrogee.
Necessary parties in a commercial real estate foreclosure may include the debtor, the assignee of the debtor, the present owner and anyone who has an equity of redemption. The county treasurer may be a necessary party pursuant to R.C. § 323.47, which states in pertinent part:
If… real estate is sold at judicial sale, … the court shall order that the taxes, penalties, and assessments then due and payable, and interest thereon, which are a lien on such land or real estate at the time of the sale, be discharged out of the proceeds of such sale or election.
Other proper parties include spouses, lienholders and tenants.
All lienholders revealed by a title search of the property should be joined as parties in order that the property is sold free and clear from all encumbrances. However, property may be sold at foreclosure subject to a prior lien (see R.C. § 2329.20). In fact, a prior lienholder may require that the property be sold subject to its mortgage. Established in Metropolitan Mortgage Co. v. Nugent Furniture Co., 40 App. 301; 179 N.E. 362 (Ohio App. 1931). Upheld in 1992 in Soc. Bank & Trust Co. v. Zigterman 611 N.E.2d 477, Ohio App. 3 Dist.,1992.
Failure To Name Lienholder:
If you fail to name an interest owner, you cannot foreclose that interest. Stewart v. Johnson (1876), 30 Ohio St. 24. The junior lienholder “passes through” the foreclosure, the property remains subject to the lien and the junior lien position is improved.
Subordination, Attornment and Non-Disturbance Agreements: The lenders tend to want to have the first and best lien on, or interest in, the property of their borrower. At the same time, they do not necessarily want to receive an empty building upon the default and foreclosure of their mortgage. This is where the subordination, attornment and non-disturbance agreement can come into play. The properly documented commercial real estate transaction will contain such agreements with all tenants of the property.
Subordination: The subordination portion of the agreement requires that the tenant acknowledge and agree that the lease is subordinate to the mortgage. However, with a mere subordination of the lease, the lender will terminate the tenant’s lease upon foreclosure and allow the tenant to walk away from the property with the tenant’s monthly rental payments.
Attornment: Under the attornment portion of the agreement, the tenant covenants that in the event of foreclosure the lease will not be extinguished. The tenant agrees to attorn to the mortgagee as landlord under the lease. The lender, therefore, retains the cash flow from the property.
Non-Disturbance: The non-disturbance portion of the agreement is the inducement offered by the landlord to the tenant for the tenant’s subordination and attornment. Here, the lender agrees that the tenant will remain in possession of the premises in the event of foreclosure provided the tenant complies with the terms and conditions of the lease. This is a true inducement to a tenant who has negotiated favorable economic terms or spent a substantial sum on tenant improvements.
Other Provisions: Lenders may add other provisions to these agreements. They may require a statement that any options to purchase are extinguished. They may require that the insurance provisions under the mortgage control the disposition of insurance proceeds over the lease.
Mortgagees seek to have the first and best lien on mortgaged property; therefore, one primary concern of commercial mortgagees should be the effect of foreclosure of a mortgage on the tenant’s interest in the property. Although the Ohio Supreme Court has ruled on this issue, Ohio case law indicates that this matter is not settled. The controversy focuses on whether the rights or the obligations of the tenant are being asserted.
LEASE SUBSEQUENT TO MORTGAGE
The impact of foreclosure of a mortgage on leases differs according to jurisdiction. The states are divided into two different positions with regard to this issue. The majority of courts hold that a subsequent lease is extinguished only if the lessee is joined in the foreclosure action. If the lessee is not made a party, the lease remains in force. The purchaser acquires the rights and duties of the mortgagor and becomes the new lessor. This majority approach allows the purchaser the option to preserve a lease which is favorable to the landlord or to discard a lease which is more favorable to the tenant. Schoshinski, American Landlord and Tenant Law § 10:5 (1980).
The minority jurisdictions are automatic termination jurisdictions. In these jurisdictions, the lease is terminated by a foreclosure action and sale whether or not the tenant was made a party to the action.
The Ohio Supreme Court has ruled that where a lease of mortgaged property is made subsequent to or subordinate to a mortgage, a sale of the property upon foreclosure terminates the lease. New York Life Ins. Co. v. Simplex Prod. Corp., 135 Ohio St. 501, 21 N.E.2d 585 (1939). The sale upon foreclosure having terminated the estate of the mortgagor, the lease, being subsequent and subordinate to the mortgage, is also terminated. According to the Simplex decision, the rights and obligations of the tenant under the lease do not extend beyond, but are terminated with the estate of the mortgagor. Both are extinguished by the sale of the premises upon foreclosure. The mortgagee, who is the successful purchaser at the foreclosure sale, will have the right of possession as against the tenant. Id. at 587.
The Simplex rule has been distinguished by some lower courts depending upon whether tenant rights or obligations are asserted. In Davis v. Boyajian, Inc., 11 Ohio Misc 97, 229 N.E.2d 116 (Stark Co., C.P. 1967), the court reversed a judgment in forcible entry and detainer entered against lessees of a mortgagor after the mortgagor’s interest had been foreclosed. The Davis court relied on Frische v. Kramer’s Lessee, 16 Ohio 125 (1847), in deciding that although the lease was subordinate to the mortgage, the foreclosure action would not terminate the rights of the lessees of the mortgagor unless the lessees were made a party to the foreclosure suit. Davis, 229 N.E.2d at 117.
The Davis court acknowledged the decision in Simplex, but distinguished the cases on the nature of the actions. In Simplex, the foreclosure purchaser had filed an action against the tenant to recover an amount allegedly due on the original lease. There was no joinder of lessees in the foreclosure action, and the lessee had no knowledge of the foreclosure action. Simplex, 21 N.E.2d at 585. In Simplex, the mortgagee sought to enforce the lease and the lessee’s obligations, while in Davis, the mortgagee was seeking to have the lease declared invalid and terminate the lessee’s right to possession. The Davis court held that the cases were apparently reconcilable on the basis that they both afford a measure of protection to the lessee. Davis, 229 N.E.2d at 117.
The case law from other Ohio courts does not recognize the distinction raised by Davis. Therefore, the question is whether Ohio law limits the Simplex approach to cases where lessee obligations are asserted, or whether it is to be more broadly construed as a statement by the Ohio Supreme Court that leases subsequent to the mortgage terminate upon foreclosure whether or not the lessee is made a party, and regardless of whether the lessee’s rights or obligations are being asserted.
The Montgomery County Common Pleas Court declined to follow the decision in Davis, holding that such a distinction was “non-workable.” Prudential Ins. Co. of Am. v. Bull Mkt., Inc., 66 Ohio Misc. 9, 420 N.E.2d 140, 143 (Montgomery Co., C.P. 1979). Thus, the Bull Market court found that the lease was terminated upon foreclosure whether or not the lessee was made a party and regardless of whether the lessee’s rights or obligations were being asserted. Id.
The Ohio Court of Appeals for Muskingum County relied on the authority of Davis and held that in order to protect a tenant’s rights, the tenant must be made a party to the foreclosure action. First Fed. Sav. and Loan Ass’n. of Zanesville v. Rig Oil Co., 1983 WL 7013 (Ohio App. 1983). The court held that while Davis appears to adopt a position opposite of Simplex, the two decisions are consistent in that they both protect the tenant. The Rig Oil court quoted the Davis decision stating, “[i]t is one thing to release [the tenant] of obligations because of a foreclosure action in which he has not been joined. . . It is the opposite thing to argue he can lose value rights in land thereby.” Id. The Rig Oil court did acknowledge the decision in Bull Market, but “decline[d] to place Ohio within the orbit of minority jurisdictions because of the Supreme Court’s over broad language in New York Life v. Simplex.” Id.
The Montgomery County Court of Appeals has declined to follow the Davis distinction, and has held that the rights of the tenant, joined or unjoined, do not survive the foreclosure. Hembree v. Mid-America Fed. Sav. & Loan Ass’n., 64 Ohio App.3d 144, 580 N.E.2d 1103 (1989). The court-defined rights enjoyed under a lease as personal rights and explained its decision as follows: Where interests are of a type properly determinable in foreclosure proceedings, they survive the foreclosure if not joined (title, liens etc.). If interests are not of this type, joinder of tenants is not necessary. If the underlying right of the tenant is cut off at foreclosure, failure to join is of no consequence. The rights of possession and quiet enjoyment conveyed through the lease are personal rights; their existence derives from the lessor’s title, and they are extinguished upon the foreclosure of that title and the interests incident to it. Absent authorization or consent by the mortgagee to execute the lease, a purchaser at judicial sale will not take subject to it. Id. at 1109. [But see Hausman v. Dayton (1995), 73 Ohio St.3d 671. where the Ohio Supreme Court declined to read Hembree as standing for the proposition that title to mortgaged property transfers automatically from a mortgagor to a mortgagee upon default of a condition of the mortgage].
The landlord and tenant relationship between the mortgagee and the tenant of the mortgagor after default on the mortgage can only be created by mutual agreement between the mortgagee and the tenant. See, Simplex, 21 N.E.2d 585. The mutual agreement may be in the form of a new lease or an agreement by the tenant in the original lease to attorn to the mortgagee in the event of foreclosure. Absent an attornment provision in the lease, the court has no power to compel the tenant to attorn to the mortgagee or to a purchaser at a foreclosure sale. Moran v. Pittsburgh, Cincinn. & St. L. Ry. Co., 32 F. 878, 887 (C.C.S.D. Ohio 1887), appeal dismissed 44 F. 113 (C.C. Neb. 1890).
Since the lease is terminated, there cannot be privity of contract or estate between the purchaser and the tenant on the basis of that terminated lease. Liability of the tenant is limited to the period he actually occupied the premises. Simplex, 21 N.E.2d at 588. The Ohio Supreme Court held in Peters v. Elkins, 14 Ohio 344, 345 (1846), that an action for use and occupation can only occur between persons having the relation of landlord and tenant. The court further concluded that a tenant who holds over after the foreclosure purchase is a wrongdoer, not a tenant of the purchaser, and an action for use and occupation will not lie. To recover rent, there must be a new lease. Id. at 347.
Payment and acceptance of rent does not recreate the relationship of landlord and tenant under the terminated lease; a new relationship is created. The tenant by merely acknowledging the mortgagee as his landlord through attornment, creates a tenancy at will. The tenancy at will is converted into a periodic tenancy by the payment and acceptance of a periodic rent. Absent an agreement to the contrary, it is usually month-to-month. Simplex, 21 N.E.2d at 587-588.
A recent discussion of the Simplex Case can be found in Brandon/Wiant Co. v. Teamor (1998), 125 Ohio App.3d 442. The Eighth District, Cuyahoga County described their view of Simplex as follows:
The first issue to be addressed is whether Simplex is controlling of the instant case. In Simplex, the court held that a foreclosure sale terminates a prior lease agreement between the mortgagor and a lessee. The purchaser does not obtain any reversionary rights of the mortgagor. Therefore, there is no privity of contract between the purchaser and the lessee that would allow the purchaser to recover any rents from the lessee. The court quoted from Peters v. Elkins (1846), 14 Ohio 344, 1846 WL 38, which stated that the lessee does not hold the premises under the consent of the purchaser and has not contracted to pay rent to the purchaser. Id., 135 Ohio St. at 505, 14 O.O. at 397-398, 21 N.E.2d at 586-587.
The Teamor Court distinguished itself from the Simplex Case on the basis of an attornment provision in the Lease:
In the instant case, Teamor did contract to pay rent to the purchaser. The lease agreement between Teamor and Midwestern stated that, if foreclosure occurred, Teamor agreed to attorn to the purchaser and to recognize the purchaser as the lessor under the lease. Although Teamor argues that the entire lease, including this provision, terminated upon the foreclosure sale, it is clear that the parties contemplated the possibility of a foreclosure sale and agreed that the lease would continue with the purchaser becoming the lessor.
The lease agreement is clear and unambiguous on its face. The parties agreed that Teamor would attorn to a purchaser. The contract provided that a purchaser at a foreclosure sale would become the lessor. Teamor expressly agreed to attorn to appellant and cannot now seek to avoid what he was obligated to do pursuant to the lease…
Because the lease agreement contained this attornment clause, Simplex is distinguishable and does not control the outcome of this case. The plain terms of the lease provide that Teamor will attorn to the purchaser of the property in a foreclosure sale and that the terms and conditions of the agreement will remain in force as between Teamor and the purchaser. Id. 125 Ohio App.3d 442. at 447-448.
United States of America
The United States may be made a party to a foreclosure action wherein it has a claim or lien. 28 U.S.C §2410(a) provides in pertinent part: …the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter… to foreclose a mortgage or other lien upon, … real or personal property on which the United States has or claims a mortgage or other lien….
However, the United States cannot be treated like any other party. Its interest must be plead with particularity, it must be served in a special manner and it is allowed extra time in which to answer. Service upon the United States is discussed in the next section.
State of Ohio
The State of Ohio may be made a party to a foreclosure action in the Court of Common Pleas or Probate Court. R.C. § 5301.24 establishes this right and establishes the procedure:
The state, or any board or commission of the state, may be made a party in any court of common pleas or probate court, to any foreclosure proceedings, or other proceedings to sell real estate and marshal liens, to secure an adjudication concerning any claim, mortgage, or other lien which the state has or claims on the premises involved.
C. LOCAL RULES:
Prior to any foreclosure action in any county, it is always important to research the local rules of the court in which the action takes place. Many counties have local rules specifically for foreclosure actions that vary from county to county. Some counties have no rules, leaving the attorney on his own to find the correct procedures. Below are two different local rules from Franklin and Cuyahoga counties respectively.
LOCAL RULE 96 Franklin County:
Franklin County Common Pleas Court Local Rule 96 Requires the plaintiff/creditor seeking to foreclose any one to four family residential real property to file a commitment for an owner’s policy of title insurance within fourteen days of filing the complaint. The commitment should contain the following:
(i) The name of the owners of the property to be sold;
(ii) A reference to the volume and page of the recording by which said owners acquired title to such real estate;
(iii) A description of all exceptions to said owner’s fee simple title and liens thereon; and
(iv) The name and address, as shown on the recorded lien, of the lien holder(s)
Also, the plaintiff/creditor is required to file an updated title commitment indicating that all necessary parties are before the court. That update needs to be filed at least 30 days before the sheriff’s sale. This rule applies only to residential property. Regardless of the limitations of this rule, a title report or review is advisable for any foreclosure.
LOCAL RULE 24 Cuyahoga County
Local rule 24 of Cuyahoga County requires that in cases to quiet title, for partition, and for the marshalling and foreclosure of liens on real property the attorney for the plaintiff shall file with the Clerk, the original guaranteed evidence of the state of the record title to the property in question (preliminary judicial report), including the names of the owners of the property, and a reference to the volume, and page and date of the recording of the next preceding recorded instrument by or through which the owners claim title, as the same shall have been prepared and extended by a responsible title and abstract company to a date not over thirty (30) days prior to the filing of the complaint.
Failure to follow this procedure will provide any interested party the opportunity to procure leave to furnish and file such evidence of title within the ensuing thirty (30) days. This evidence shall become and remain a part of the case file.
Cuyahoga County is unique to other courts in that it has magistrates who do nothing but foreclosure cases. Most attorneys will find these magistrates very knowledgeable and helpful in understanding the foreclosure process in that county.
D. SERVICE OF PROCESS
Service of process is critical to a successful and effective foreclosure action. Without service upon a party, the interest of that party cannot be foreclosed and the property will not be sold free and clear of all liens.
Types of Service of Process
Although residence service is permitted under Ohio Civil Rule 4.1(3), it is not the preferred method in a foreclosure action, because it is not possible to determine who has accepted service. Acceptable methods of Service include: (1) service by certified mail, Ohio Civil Rule 4.1(A); and (B) personal service, Ohio Civil Rule 4.1(B). where certified mail is returned refused or unclaimed, upon request, regular mail service is permitted, Ohio Civil Rule 4.6(C) and (D). When the residence of a defendant is unknown, service may be made by publication, Ohio Civil Rule 4.4. In the commercial real estate foreclosure the owners are often partnerships. Corporations and other legal entities are often involved. Ohio Civil Rule 4.2 provides that service of process may be made as follows:
(F) Upon a corporation either domestic or foreign: by serving the agent authorized by appointment or by law to receive service of process; or by serving the corporation by certified mail at any of its usual places of business; or by serving an officer or a managing or general agent of the corporation;
(G) Upon a partnership, a limited partnership, or a limited partnership association by serving the entity by certified mail at any of its usual places of business or by serving a partner, limited partner, or manager or member;
(H) Upon an unincorporated association by serving it in its entity name by certified mail at any of its usual places of business or by serving an officer of the unincorporated association;
(I) Upon a professional association by serving the association in its corporate name by certified mail at the place where the corporate offices are maintained by or serving a shareholder
Service by Publication:
Service by publication is used as a last resort. Under Rule 4.4 and R.C. § 2703.14, service by publication is acceptable if the residence is unknown and cannot be determined through “reasonable diligence”. In order to request service by publication, the attorney must file an affidavit with the court setting forth that service cannot be made because the residence of the defendant is not known and that it cannot be determined with reasonable diligence. The affidavit must include the last known address of the defendant.
The plaintiff then instructs the clerk to request publication in a newspaper of general circulation, at least once a week for six successive weeks, and must be published in the county where the complaint is filed. Service is considered completed on the last day of publication. Under Rule 12, the defendant has 28 days to respond after the last date of publication.
Service on the State of Ohio
Under R.C. §. 5301.24:
Service of summons shall be made by the clerk of the court who shall, by registered mail, send service of summons and a copy of the petition to the attorney general. The answer day and other proceedings thereafter shall be the same as though a personal service had been made as of the date the return receipt is signed, and thereafter the procedure shall be the same as though a private corporation had been sued under the laws of this state.
Service on the United States
28 U.S.C. § 2410 provides that the USA can only be served if copies of the complaint are served by certified mail as follows:
1. One copy on the US Attorney for the district in which the foreclosure action is brought
2. Two copies to the Attorney General of the USA, Washington D.C. 20530.
By statute, the USA has 60 days to respond.
E. TITLE STANDARDS
Service of process in a foreclosure action is more than merely obtaining jurisdiction over the defendants. It is a matter of obtaining good and marketable title for the purchaser at the foreclosure sale. The Ohio State Bar Association has adopted the Ohio Standards of Title Examination. Several of these standards are applicable to service of process in the foreclosure action.
Problem A of standard 9.1 provides that the return receipt does not need to be signed by the addressee himself. The comment to this Standard states:
Certified mail service as provided under the Ohio Rules of Civil Procedure does not require “actual service” upon the defendant, but is effective upon a “certified delivery”. Due process is effectively met by the standard delineated in Mullane v Central Hanover Bank and Trust Co., 339 U.S. 306, and In Re Foreclosure of Liens, 62 Ohio St. 2d 333. The standard provides that for certified mail service to be valid, such service “…must be reasonably calculated under all the circumstances, to apprise interested parties of the pendency of the action and to afford them an opportunity to, present their objection.” (Emphasis added.) Mitchell v. Mitchell, 64 Ohio St. 2d 49, 51, 18 003d 254.
(Standard A originally effective April 29, 1971. Amended November 11, 1972, and further amended effective November 7, 1981.) Also see Akron-Canton Airport Authority v. Swinehart, 62 Ohio St. 2d 403; 16 003d 436, 406 N.E.2d 811(1980).
Problem B of Standard 9.1 provides that when the return receipt is signed by someone other than the addressee, it is not required that the addressee’s name appear on the return receipt as the post office provides. Comment B also adds:
However, in multiple-defendant cases each return receipt should show data sufficient to enable the examiner to identify the addressee to whom the receipt pertains. If the name of the addressee does not appear on the receipt or is illegible, the examiner should attempt to identify the addressee by comparing the certified number, the address where delivered, the postmark or other data shown on the receipt with the clerk’s records concerning the mailing and with the other return receipts in the file.
“Certified mail service…is valid where the envelope containing the documents to be served is delivered to a person other than the defendant at the defendant’s address.” Mitchell v. Mitchell, 64 Ohio St. 2d 49, 51, 18 003d 254.
Further, both Rule 4.1 and 4.3 of the Ohio Rules of Civil Procedure provide that once the clerk has properly addressed the envelope to the person to be served at their last known address, affixed postage and sealed the envelope as certified mail, return receipt requested, the clerk must instruct the delivering postal employee to show to whom delivered, date of delivery, and address where delivered.
(Standard B originally effective April 29, 1971. Amended November 11, 1972, and further amended effective November 7, 1981.)
Problem C of Standard 9.1 provides that it is not a requirement that signatures on the return receipt be legible. Problem G of Standard 9.1 provides that when the return receipt is not signed by the addressee himself, it is not necessary that inquiry be made concerning the identity of the recipient, his relationship to the addressee or his connection with the place of delivery, unless there are other factors which would be sufficient to create a reasonable doubt in the mind of the examiner concerning the propriety of the delivery.
F. OBTAINING JUDGMENT
If the debtor/defendant fails to plead or otherwise defend, a default judgment may be sought pursuant to Ohio Civil Rule 55. The procedure varies from county to county. Therefore, the local rules should be reviewed and/or local counsel and the court should be consulted. Depending on the county, a motion for default judgment needs to be filed and/or a judgment decree in foreclosure needs to be first circulated to all counsel of record for their approval and then to the Court.
The plaintiff may move for summary judgment pursuant to Ohio Civil Rule 56 if there are no genuine issues as to any material fact and the plaintiff is entitled to judgment as a matter of law. Pursuant to this rule plaintiffs typically support their motion by filing an affidavit in support. This requires that the adverse party respond by affidavit or as otherwise provided in the rule, and not rest upon the mere allegations or denials of his pleadings. The plaintiff may also consider filing a certified copy of the mortgage. Section 5301.43 of the Ohio Revised Code provides as follows:
A copy of the record of a deed or other instrument of writing, certified by the county recorder with his official seal affixed thereto, shall be received in all courts and places within this state, as prima-facie evidence of the existence of such instrument, and as conclusive evidence of the existence of such record.
A real estate foreclosure action is a proceeding in equity to which there is no right to a trial by jury. However, if in the same action there are issues relating to claims and counterclaims for money damages, there is a right of jury trial for those issues. Carl Sectional Home Inc. v Key Corporation, 1 Ohio App. 3d 101, 439 N.E.2d 915, (1981). Count I of the complaint is typically a claim for money damages pursuant to the promissory note. Fortunately for the lender in commercial real estate transactions, cognovit notes are enforceable in the commercial setting. Therefore, the lender can avoid a trial by jury by insisting on a cognovit note at the documentation stage.
Oftentimes in commercial loan documents, the lender inserts a provision that requires the borrowing party to waive his right to a jury trial
One of the best and most expedient methods for the plaintiff to gain control of the property, or at least take control away from the owner, is by the appointment of a receiver. Since the owner/defendant will oppose the appointment, and since the plaintiff is seeking such appointment, there tends to be a natural friendliness between the plaintiff and the receiver.
Often the plaintiff will seek the appointment of a specific person as receiver. In the commercial real estate foreclosure, this person is often another attorney, unaffiliated with the plaintiff’s counsel’s firm, who in turn hires a management company to assist in the day-to-day management functions. This is applicable in cases where the property is a large commercial property.
Section § 2735.01 of the Ohio Revised Code provides for the appointment of a receiver when it appears that the mortgaged property is in danger of being lost or removed. Pursuant to this statute, creditors are entitled to the appointment of a receiver on any one of the following grounds:
In an action by… a creditor to subject property or a fund to his claim, … and when it is shown that the property or fund is in danger of being lost, removed, or materially injured (See R.C. § 2735.01(A));
In an action… by a party whose right to or interest in, the property or fund, or the proceeds thereof, is probable, and when it is shown that the property or fund is in danger of being lost, removed, or materially injured (See R.C. § 2735.01(A));
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 (See R.C. § 2735.01(B));
In all other cases in which receivers have been appointed by the usages of equity (See R.C. §2735.01(F)).
If the mortgage expressly provided for the appointment of a receiver, no showing of inadequacy of security is required. Hutchinson v. Straub, 64 Ohio St. 413 (1901); Birmingham v. Brown, 32 Ohio App. 547 (1929).
The appointment of a receiver is an extraordinary remedy and is classified as one of the provisional remedies to the main action. Cheney v. Maumee Cycle Co., 64 O.S.205, 60 N.E. 207, (1901). The appointment is treated as an equitable execution, and the receiver’s seizure of the property is actually an equitable levy which fixes the rights of creditors in the property as fully as the right of an attaching or judgment creditor is fixed by the levy under an attachment or execution. Doyle v. Yoho Hooker Youngstown Co., 130 O.S.400, 4 OOps 566, 200 N.E. 123 (1936).
H. THE SALE
The attorney requesting that the property be sold, must issue an Order of Sale to the Sheriff by way of a Praecipe. The minimum deposit should be specified and the Praecipe must include instructions that the property be appraised and the sale be advertised for the number of weeks required under R.C. § 2329.27 and R.C. § 2329.26 (see below).
The appraisal shall be performed by three disinterested freeholders who are residents of the county where the lands are situated. R.C. §2329.17. The land may not be sold for less than two-thirds of the appraised value. No tract of land shall be sold for less than two-thirds of the value returned in the inquest. Where a junior mortgage or other junior lien is sought to be enforced, subject to a prior lien, the minimum amount for which such real estate may be sold shall not be less then two-thirds of the difference between the value of the real estate appraised and the amount remaining unpaid on the claims or obligations secured by such prior lien. R.C. §2329.20.
The property to be sold must be advertised for thirty days before the day of sale. R.C. § 2329.26 requires that the advertisement be published in a newspaper of general circulation. Recent case law defines a newspaper of general circulation to be a publication of a type to which the general public resorts for news of passing events of a political, religious, commercial or social nature. Record Publishing Co. v. Kainrad, 49 Ohio St. 3d 296; 551 N.E.2d 1286 (1990).
Prior to the 1976 Amendments, it was required that advertisement be published for five consecutive weeks. Although many attorneys still work under this rule (whether by habit or caution), R.C. §2329.27 provides that it is sufficient to advertise for three consecutive weeks on the same day of the week. If the local area involved has a choice of advertising in a weekly or a daily publication, the expense of publication in a daily may not exceed the cost of publishing it in a weekly.
There exist statutory requirements regarding the contents of the advertisement. R.C. § 2329.23 requires the following contents to appear in the notice:
(1) the legal description
(2) In a municipality, the street number (if non-identification in relation to crossroads).
R.C. § 2329.24 requires that the name of the township must be included if the land to be sold is not within the limits of a municipal corporation.
R.C. § 2329.26 requires the advertisement to furnish notice of the time and place of the sale.
If the ad is improper and does not contain the required statutory information or does not follow the procedure set out by statute, the sale may be set aside.
R.C. § 2329.21 requires the purchaser, in certain cases, to add enough to pay costs. Where the foreclosure sale relates to the enforcement of a junior lien and such sale is subject to a prior lien, and if the bid is insufficient to pay costs and allowances, as determined by the court prior to the sale, then the purchaser must pay the amount of his bid plus an amount sufficient to pay the costs and allowances.
If the purchaser fails to pay, R.C. § 2329.30 provides that after the court receives such notice, the court shall punish the purchaser for contempt.
Once the purchaser has paid, R.C. § 2329.32 permits the officer to retain the money until the court examines his proceedings, endorsed pursuant to R.C. § 2329.28 on a writ of execution, and then he shall pay it to the person entitled thereto, under the order of the court. This is done pursuant to an order of confirmation of sale and distribution of proceeds.
In the event the property is not sold due to a lack of bidders, upon the plaintiff’s motion the court shall have the property appraised and advertised one more time. R.C. § 2329.51.
R.C. § 2329.36 provides that on confirmation of sale, the officer selling the property deliver a deed to the purchaser. It provides:
An officer… who sells real property, on confirmation of the sale, must make to the purchaser a deed, containing the names of the parties to the judgment, the names of the owners of the property sold, a reference to the volume and page of the recording of the next preceding recorded instrument by or through which the owners claim title, the date and amount of the judgment, the substance of the execution or order on which the property was sold, the substance of the officer’s return thereon, and the order of confirmation. The deed shall be executed, acknowledged, and recorded as other deeds.
The deed provided for in R.C. § 2329.36 shall be prima facie evidence of the legality and regularity of the sale. All estate and interest of the prior owner shall be vested in the purchaser by such sale. R.C. § 2329.37. The doctrine of caveat emptor applies to mortgage foreclosure sales. The purchaser cannot object to the confirmation of the sale on the grounds of defective title. Jewett v. Feldheiser, 68 Ohio St. 523, 67 N.E. 1072 (1903).
Legal title does not vest in purchaser until confirmation, but upon confirmation, title relates back to the date of the sale for the purpose of the purchaser receiving the benefits from the property and bearing the burdens thereof. Parker v. Storts, 15 Ohio St. 351 (1864); see further Women’s Federal Savings Bank v. Pappadakes, 38 Ohio St. 3d 143, 527 N.E.2d 792 (1988).
Invalidation of the Sale
Pursuant to Section 2329.31 the trial court is to carefully examine the proceedings of the officer making the sale and determine the legality of such sale. Whether a sale should be confirmed or set aside is within the sound discretion of the trial court. Michigan Mortgage Corp. v. Oakley, 68 Ohio App. 2d 83, 84 (Ct. App. Warren County, 1980). However, this discretion must be sound and equitable in light of all circumstances. Central National Bank of Cleveland v. Ely, 37 Ohio L. Abs. 18, 44 N.E.2d 822 (Ct. App. Cuyahoga County, 1942). The Courts have refused to grant confirmation of sale in certain circumstances where there is evidence of material irregularities in the conduct of the sale, mistake, fraud, reduction of competition among bidders or inadequacy of price.
The Court may not confirm the foreclosure sale if it determines that there were irregularities in the conduct of the foreclosure sale. For example, the trial court may refuse to confirm the sale if it determines that there was inadequate notice to all interested buyers because the sale was not advertised in a newspaper of general circulation throughout the county. Craig v. Fox, 16 Ohio 563 (1847). On the other hand, where there is an allegation of a defect in the description of the land sold at foreclosure, but no showing that the defect influenced the sale price, which was adequate, the trial court must confirm the sale. Wilson v. Scott, 29 Ohio St. 636 (1876).
Generally, the courts hold that mutual mistake or misapprehension regarding the conditions of a foreclosure sale may serve to warrant a refusal to confirm the sale. Central National Bank of Cleveland v. Ely, 37 Ohio L. Abs. at 21. However, courts have allowed a unilateral mistake to serve as a basis for refusing to confirm a judicial sale when the purchase price of the property is inadequate. Merkle v. Merkle, 116 Ohio App. 370.
Fraud may constitute another ground for refusing to grant confirmation of a foreclosure sale. Central National Bank of Cleveland v. Ely, 37 Ohio L. Abs. at 21.
The courts have further held that a stifling of competition in bidding which adversely affects the sale price of the property chills the sale and, is a form of fraud which the courts refuse to confirm the sale. Further, in sheriff sales, everything should be fair, and any agreement between two or more to prevent competition, will avoid such sale, provided any one engaged in such combination becomes a purchaser. Seymour v. Milford & Chillicothe Turnpike Co., 10 Ohio 476, 490 (1841).
Courts may set aside a judicial sale on a finding that the purchase price is too low. However, mere inadequacy of price will not justify refusal to confirm the sale unless it is such as to raise conviction that the property was unnecessarily sacrificed, or additional circumstances exist such as mistake or fraud. Secor v. Maumee Rolling Mill Co., 1 Ohio N.P. 100; Dairymen’s Cooperative Sales v..Frederick Dairy Inc., 17 Ohio L. Abs. 690 (1934).
I. CONFIRMATION OF SALE AND DISTRIBUTION OF PROCEEDS
The court is to confirm the sale upon return of the writ of execution. Section § 2329.31 provides:
Upon the return of any writ of execution for the satisfaction of which lands and tenements have been sold, on careful examination of the proceedings of the officer making the sale, if the court of common plea finds that the sale was made, in all respects, in conformity with sections 2329.01 to 2329.61, inclusive, of the Revised Code, it shall direct the clerk of the court of common pleas to make an entry on the journal that the court is satisfied of the legality of such sale, and that the officer make to the purchaser a deed for the lands and tenements.
The Order of Confirmation of Sale and Distribution of Proceeds typically contains the following:
An order that the Sheriff convey the property to the successful bidder.
An order awarding a writ of possession to the purchaser.
An order to the clerk of courts to release and satisfy the mortgages and liens of the parties to the action.
An order to the Sheriff to distribute the proceeds of the sale in the order of priority. Here, the proceeds may be distributed as follows: (a) real estate taxes (R.C. § 323.47); (b) court costs; (c) sheriff’s deed fee (R.C. §311.17(B)(5)); (d) poundage to the sheriff (R.C. § 311.17(b)(4) and (5)); (e) transfer tax; (f) lienholders in order of their priority; and (g) if any proceeds are left, to the owner.
J. RIGHTS OF REDEMPTION
Redemption is a right which the mortgagor has to pay the debt secured by a mortgage on his property, and thereby redeem the property from sale. Hausser/Van Aker, Ohio Real Estate Law and Practice, 1990. This right applies to both redemption of personal as well as real property.
Hausman v. Dayton, 653 N.E.2d 1190 is one of the most recent cases in Ohio dealing with the rights of redemption, quoting an earlier case favorably which states that the right of redemption “is not a debt owed to the mortgagor by the mortgagee, but rather is a mortgagor’s right to take prescribed action to satisfy a debt secured by a mortgage. Therefore, the right of redemption cannot be construed as a setoff.” Hausman, 1195.
R.C. § 2329.33 permits the mortgagor/debtor to redeem the real estate from sale by depositing with the clerk the amount of the judgment, all costs (including poundage) and interest at the rate of 8% per annum, except where the judgment creditor is the purchaser.
In sales of real estate on execution order of sale, at any time before the confirmation thereof, the debtor may redeem it from sale by depositing in the hands of the clerk of the court of common pleas to which such execution or order is returnable, the amount of the judgment or decree upon which such lands were sold, with all costs, including poundage, and interest at the rate of 8% percent per annum on the purchase money from the day of sale to the time of such deposit, except where the judgment creditor is the purchaser, the interest at such rate on the excess above his claim. The court of common pleas thereupon shall make an order setting aside such sale, and apply the deposit to the payment of such judgment or decree and costs, and award such interest to the purchaser, who shall receive from the officer making the sale the purchase money paid by him, and the interest from the clerk.
R.C. § 2329.33. The mortgagor/debtor may use funds obtained from a third party. Any deposited funds must be capable of immediate use and division. Toledo Trust Co. v. Yakumithis Ent. Inc., 35 0 App.~3d 31, 519 N.E.2d 425 (1987); Women’s Federal Savings Bank v. Pappadakes, 38 OS3d 143, 527 N.E.2d 792 (1988).
The United States of America: The USA has a special right of redemption found in 28 U.S.C. section 2410 (c) which permits them to purchase the property within one year from the date of the sale except the IRS has 120 days after the decree is filed.
K. LIS PENDENS
The doctrine of lis pendens effectively cuts off the ability of others to obtain an interest in the premises which is the subject of a foreclosure action. Section § 2703.26 of the Ohio Revised Code provides.
When summons has been served or publication made, the action is pending so as to charge third persons with notice of its pendency. While pending, no interest can be acquired by third persons in the subject of the action, as against the plaintiff’s title.
Section § 2703.27 of the Ohio Revised Code establishes the doctrine of lis pendens as to property located in a county other than the one where the foreclosure action is brought. It states in pertinent part:
When a part of real property, the subject matter of an action, is situated in a county other than the one in which the action is brought, a certified copy of the judgment is such action must be recorded in the county recorder’s office of such other county before it operates therein as notice so as to charge third persons, as provided in section 2703.26 of the Revised Code. It shall operate as such notice, without record, in the county where it is rendered.
(Also see discussion above regarding Ohio Civil Rule 3(F)).
When service of process has been completed a supplemental title search needs to be performed to determine what liens or interests have attached to the premises between the time of the initial search to commence the foreclosure action and the completion of service of process. Intervening lienholders or holders of an interest in the premises should be joined as party defendants in order that the premises can be sold free and clear of those interests. The benefit of the rule relating to lis pendens may be lost by such long continued inaction as amounts to gross negligence of the plaintiff when such inaction is to the prejudice of innocent persons. Fox v. Reeder, 28 Ohio St. 181(1875). Under old law the benefit of lis pendens was not necessarily available to the purchaser at a foreclosure sale as against a mechanics lienholder. Holland Furnace Co. v. Stevenson, 9 Ohio Law Abs 48 (1930). Ohio Revised Code 1311. 21 (C) has codified the lis pendens/mechanics lien issue as follows:
The rule of lis pendens does not apply to a mechanics’ lien claimant whose lien rights arose or accrued before an action involving the real property which is the subject of that lien became pending pursuant to section 2703.26 of the Revised Code and whose lien is filed within the statutory period but subsequent to the date the action becomes pending pursuant to section 2703.26 of the Revised Code
Articles appearing herein are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek the advice of a licensed attorney.