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Appellate Court Upholds Expanded Powers of Receiver Where Borrower Waives Rights in Loan Documents

By: Reuel D. Ash

About: Appellate Litigation

May 2013 – A recent decision by the Eighth Appellate District (the court of appeals located in Cuyahoga County) confirms that courts may grant appointment of a receiver on an expedited basis, with expanded powers to carry on the borrower’s business, where the parties have agreed to those powers in advance, and where facts and situations warrant an expedited appointment.

The facts in U.S. Bank v. Gotham King Fee Owner, L.L.C, et al.1  are fairly straightforward. U.S. Bank was the assignee of a promissory note in the amount of $135,000,000, originally executed in favor of Lehman Brothers Bank, F.S.B. The note was secured by a mortgage and by an assignment of leases and rents, eventually assigned to U.S. Bank. The mortgaged property consisted of nine “Class A” office buildings. When the borrowers defaulted on the note and the related loan documents, U.S. Bank initiated foreclosure proceedings, and filed an emergency motion for the appointment of a receiver. Because many tenants were not subject to long-term leases, the bank alleged that a receiver was necessary to safeguard and protect the property.2

The trial court granted U. S. Bank’s motion to appoint a receiver before Gotham’s response was due. The trial court’s judgment granted the receiver a pre-judgment power of sale and authorized the receiver to enter into, modify, or terminate all leases for all or part of the properties, and to do so without notice to Gotham or court approval.

The court’s order also authorized U.S. Bank to make advance payments for utilities, security, insurance, taxes, professional services such as lawyers and accountants, and “other expenses necessary to maintain and preserve the Property.” The order provided that any and all of the advancements “shall become expenses of the receivership, shall be reimbursable directly to [U.S. Bank], shall constitute obligations of the Defendants under the loan documents, and shall be secured by the Property.” 2013-Ohio-1983 at ¶6.

On appeal, Gotham argued that the trial court granted the receiver powers that exceeded those permitted by Ohio law, and that the court improperly delegated its supervisory role over the receiver to U.S. Bank. Gotham also argued that the trial court erred in appointing the receiver without notice or a hearing. Id. at ¶7. The appeals court affirmed the receivership order, finding “no merit to the appeal.” Id. at ¶1.

While the appeals court observed that the receivership statute implies a requirement of notice and a hearing, the court held that the “general rule requiring notice is not inflexible” and that the court “may appoint a receiver without notice if the facts and situation warrant such an appointment,” Id. at ¶12.  The court found that the appointment without notice was within the trial court’s discretion, because in the loan documents, the borrower had waived its right to oppose the appointment of a receiver, and had consented to such appointment without notice upon default.

It is not uncommon to appoint a receiver without notice or hearing where the property may decline in value, or where there is danger of immediate harm to the property. The decision in Gotham King is significant because the court did not find any such danger; there was no evidence that these commercial buildings were declining in value, or being neglected. The only “facts and situation” that justified the ex parte appointment were the terms of the loan documents.

The appeals court relied heavily on the loan document terms in upholding the receiver’s right to enter into leases without court approval, borrow funds for receivership expenses, preservation and repairs, and to conduct a sale of the property before the entry of a final foreclosure judgment. As to the leases, the appeals court found that the borrower had absolutely assigned the leases and rents to the lender, retaining only a license to those leases and rents. The court further found that the borrower’s license terminated automatically upon default, and the borrower thereupon “lost any interest it had in the leases and rents….” Id.  at ¶19. Having lost its interest in the leases, the borrower was likewise not entitled to notice of any changes to the leases, a right the borrower waived in the mortgage.

The appeals court similarly brushed aside the borrower’s concern about the advancement of expenses, writing that “given the immense size of the property in the receivership estate, it would be an undue burden and a waste of judicial resources to require the receiver to obtain court approval prior to incurring any expense on behalf of the property, no matter how small.” Id. at ¶25. The court also observed that the receiver’s right to borrow money to preserve receivership property as well as the lender’s right to immediate appointment of the receiver were provided for in the loan documents. Id. at ¶23, 26.

In the same vein, the court rejected the borrower’s argument that it was denied due process when the receiver was authorized to sell the properties before obtaining a final foreclosure judgment. The court observed that “by requiring the receiver to
obtain court approval of any sale, the court can review the fairness of the sale terms
and allow Gotham to respond to any requested sale. Therefore, Gotham’s due process rights are protected.” Id. at ¶28. Finally, the court again relied on the loan documents in rejecting the borrower’s argument that the receiver was erroneously granted unfettered powers without sufficient judicial oversight.  Id. at ¶30.

Conclusion. The appeals court’s decision clarifies a receiver’s powers to manage and maintain real property pending a sale. Borrowers and lenders should take careful note of the appeals court’s reliance on the language of the loan documents. Particularly in commercial loans between sophisticated parties, this ruling makes it clear that courts will enforce such terms. Even if the loan documents grant powers that may exceed the limits of the receivership statute, parties should not rely on the court to enforce statutory remedies that the borrower has waived in a contract.

If you have any questions or would like additional information, please contact Ulmer & Berne LLP.

This article was co-authored by Jeffrey Baddeley.

12013-Ohio-1983 (8th App. Dist. May 16, 2013).
2The foreclosure followed an extended effort to renegotiate the terms of the loan. The $135 million purchase price paid in 2007 for the office buildings, located in Cleveland’s east suburbs, was reportedly the highest price per square foot ever paid for similar properties.