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Parties to commercial loans should take note of the Eighth Appellate District’s recent ruling. In U.S. Bank, N.A. v. Gotham King Fee Owner, L.L.C, 2013-Ohio-1983 (8th App. Dist. May 16, 2013), the Eighth Appellate District (Cuyahoga County) confirmed that courts may appoint a receiver, with expanded powers, on an expedited basis. The terms of the parties’ loan documents proved to be very important in its reasoning. As an initial matter, the decision demonstrates that appointment of a receiver can be a useful remedy for a lender that wants to sell collateral following a borrower’s default. It also serves to remind us that the specific language of loan documents is critically important. This ruling highlights the importance of contract terms and demonstrates that courts will enforce such terms, particularly with respect to commercial loans.

The relevant facts

U.S. Bank was assigned a $135,000,000 promissory note secured by a mortgage and an assignment of leases and rents. The mortgaged property consisted of nine “Class A” office buildings. Upon default, U.S. Bank initiated foreclosure proceedings and filed an emergency motion to appoint a receiver to safeguard and protect the property. Before Gotham’s response was due, the motion was granted and a receiver was appointed.

The trial court granted the receiver a pre-judgment power of sale, and authorized the receiver to enter into, modify, or terminate leases without notice to Gotham or court approval. The trial court also authorized U.S. Bank to make certain advance payments, with such payments to become expenses of the receivership, reimbursable to U.S. Bank, and secured by the property.

On appeal, Gotham argued that the trial court erred in appointing the receiver without first holding a hearing. The appeals court acknowledged that Ohio’s statute implies that a court may only appoint a receiver after a hearing and receipt of evidence justifying the appointment. It held, however, that the general rule requiring notice “is not inflexible” and that the court may appoint a receiver absent notice if the facts and situation warrant such an appointment.

The Eighth Appellate District found that the circumstances in this case warranted appointment of a receiver without notice. The appellate court found that it was within the trial court’s discretion to appoint a receiver without a hearing because the borrower waived its right to oppose the appointment of a receiver in the loan documents. Moreover, the borrower consented to the immediate appointment of a receiver without notice upon default. This is significant because it appears that the terms of the loan documents themselves were the only “facts and situation” that warranted the appointment of a receiver without notice in this case.

The appellate court also rejected Gotham’s argument that it was denied due process when the trial court authorized the receiver to sell the properties before obtaining a final foreclosure judgment. The appellate court rejected this argument because the receiver was required to obtain court approval of any sale, thereby affording the court the opportunity to review the sale terms, and providing Gotham the opportunity to respond to any requested sale. Thus, the appellate court concluded, Gotham’s due process rights are protected.

Similarly, the appellate court did not agree with Gotham’s contention that the trial court abused its discretion when it authorized the receiver to take actions with respect to the leases without court approval or notice to Gotham. The appellate court found that, pursuant to the terms of the parties’ loan documents, Gotham assigned the leases and rents to U.S. Bank, and that Gotham’s license to utilize the leases and rents terminated upon default. In other words, Gotham lost any interest it may have had in the leases and rents, so it was not entitled to notice of any changes to the leases.

Finally, the Eighth Appellate District dispensed with Gotham’s concerns about the trial court’s authorization of certain advance payments. The appellate court found that the provisions of the trial court’s judgment concerning advancements were consistent with the loan documents, thus the trial court did not abuse its discretion in authorizing them. 

For more information, please contact:

Matthew A. Salerno
216.430.2051
msalerno@mcdonaldhopkins.com

The twists and turns of business restructuring are complex and demanding. Our attorneys approach every case with creativity and insight to ensure the solutions are cost-effective and practical. At every turn, you can be confident that our attorneys will guide you through the process, always providing practical and informed advice. We are positioned to respond to the special demands of a variety of matters in a wide range of industries, including health care, automotive, retail/distribution, real estate/construction, telecommunications, and mining/exploration.

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