U.S. Bank, N.A. v. Gotham King Fee Owner, L.L.C.

[Cite as U.S. Bank, N.A. v. Gotham King Fee Owner, L.L.C., 2013-Ohio-1983.]
Court of Appeals of Ohio
EIGHTH APPELLATE DISTRICT
COUNTY OF CUYAHOGA
JOURNAL ENTRY AND OPINION
No. 98618
U.S. BANK, N.A., ETC.
PLAINTIFF-APPELLEE
vs.
GOTHAM KING FEE OWNER, L.L.C., ET AL.
DEFENDANTS-APPELLANTS
JUDGMENT:
AFFIRMED
Civil Appeal from the
Cuyahoga County Court of Common Pleas
Case No. CV-783271
BEFORE: E.T. Gallagher, J., Keough, P.J., and McCormack, J.
RELEASED AND JOURNALIZED: May 16, 2013
ATTORNEYS FOR APPELLANT
Patrick T. Lewis
Gretchen L. Lang
Thomas M. Wearsch
Baker & Hostetler, L.L.P.
PNC Center
1900 East 9th Street, Suite 3200
Cleveland, Ohio 44114
ATTORNEYS FOR APPELLEES
For U.S. Bank, National Association, etc.
Michael P. Shuster
Leo M. Spellacy, Jr.
Porter, Wright, Morris & Arthur, L.L.P.
925 Euclid Avenue, Suite 1700
Cleveland, Ohio 44115
Tami Hart Kirby
Porter, Wright, Morris & Arthur, L.L.P.
One South Main Street, Suite 1600
Dayton, Ohio 45402
For Cleveland-Cuyahoga County Port Authority
Patricia M. Ritzert
Climaco, Wilcox, Peca, Tarantino & Garofoli Co., L.P.A.
55 Public Square, Suite 1950
Cleveland, Ohio 44113
Timothy J. McGinty
Cuyahoga County Prosecutor
BY: Anthony J. Giunta, Jr.
Michael A. Kenny, Jr.
Colleen Majeski
Gregory B. Rowinski
Assistant Prosecuting Attorneys
The Justice Center
1200 Ontario Street
Cleveland, Ohio 44113
For Cuyahoga County Treasurer
Timothy J. McGinty
Cuyahoga County Prosecutor
BY: Adam D. Jutte
Assistant Prosecuting Attorney
The Justice Center
1200 Ontario Street
Cleveland, Ohio 44113
For State of Ohio, Department of Development
Mike DeWine
Ohio Attorney General
30 East Broad Street
State Office Tower - 25th Floor
Columbus, Ohio 43215
For Rodger W. Rolfe
Rodger W. Rolfe, pro se
6382 Melshore Drive
Mentor, Ohio 44060
For David M. Browning, Receiver-Appellee
Kenneth R. Callahan
Jeffrey C. Toole
Buckley King, L.P.A.
1400 Fifth Third Center
600 Superior Avenue, East
Cleveland, Ohio 44114
EILEEN T. GALLAGHER, J.:
{¶1} Defendant-appellant, Gotham King Fee Owner, L.L.C. (“Gotham”), appeals
the trial court’s judgment appointing a receiver to operate several of its buildings during
the pendency of foreclosure proceedings. We find no merit to the appeal and affirm.
{¶2} Plaintiff-appellee, U.S. Bank N.A. (“U.S. Bank”), filed a foreclosure action
against Gotham alleging that it was the holder of a promissory note (“the note”) in the
amount of $135,000,000, executed by Gotham and delivered to Lehman Brothers Bank,
F.S.B. (“Lehman”). It also alleged that to secure the note, Gotham executed and
delivered in favor of Lehman an “Open End Mortgage and Security Agreement” in the
amount of $135,000,000 (the “Mortgage”). The “Property,” as defined in the complaint,
consists of nine “Class A” office buildings. Gotham also executed and delivered in favor
of Lehman an “Assignment of Leases and Rents” (the “Assignment”), in which Gotham
assigned all of its rights to the leases and rents from the Property to Lehman.
{¶3} Lehman subsequently assigned all of its interests in the loan documents to
LaSalle Bank N.A., which assigned all of its interests to U.S. Bank. U.S. Bank alleges
that Gotham defaulted on the note and the associated loan documents as a result of missed
payments and certain covenant violations. U.S. Bank also brought claims against
codefendant Charles Ishay (“Ishay”) seeking a recourse judgment on the note and Ishay’s
guaranties.
{¶4} When U.S. Bank filed its complaint, it simultaneously filed an emergency
motion for the appointment of a receiver for the Property, asserting that a receiver was
necessary “to safeguard and protect the Property due to the significant number of tenants
not currently subject to long-term leases.” It argued that U.S. Bank was contractually
entitled to the appointment of a receiver pursuant to two provisions in the parties’ loan
documents.
{¶5} The trial court granted U.S. Bank’s motion to appoint a receiver before
Gotham’s response was due to be filed. 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 receiver order states, in relevant part:
The Receiver is hereby authorized to enter into or renew any lease or
license agreement with respect to the Property, for any space located
therein, on such terms and conditions as it deems appropriate; provided
however, that any such lease or license agreement shall be first approved by
Noteholder. In accordance with Ohio law, the Receiver is hereby
authorized to reject or restructure any burdensome leases if first approved
by Noteholder.
{¶6} Paragraph 15 of the court’s order also authorized the noteholder, 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.” This paragraph provides that any and all of these 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.”
{¶7} In its sole assignment of error, Gotham argues the trial court granted the
receiver powers that exceed those permitted by Ohio law and improperly delegated its
duty to supervise the receiver to U.S. Bank. Gotham also argues the trial court erred in
granting U.S. Bank’s motion without notice or a hearing.1
Standard of Review
{¶8} A trial court is vested with sound discretion to appoint a receiver. State ex rel.
Celebrezze v. Gibbs, 60 Ohio St.3d 69, 73, 573 N.E.2d 62 (1991). Further, the court may
exercise its discretion “to limit or expand a receiver’s powers as it deems appropriate.”
Id. at 74. Therefore, an order appointing a receiver will not be reversed on appeal absent
an abuse of discretion. Id.
Notice and Hearing
{¶9} Gotham argues the trial court erred when it appointed a receiver without
holding a hearing and giving Gotham an opportunity to be heard.
{¶10} Because the appointment of a receiver necessarily requires dispossessing the
owner of his or her property, courts have generally required that notice be given before
the appointment of a receiver. Mfr.’s Life Ins. Co. v. Patterson, 51 Ohio App.3d 99, 100,
An order appointing a receiver is a final order under R.C. 2505.02(B)(2) because it “affects
1
a substantial right made in a special proceeding.” Cunningham v. Ohio Police & Fire Pension Fund,
175 Ohio App.3d 566, 2008-Ohio-218, 888 N.E.2d 453, ¶ 6 (8th Dist.). Such an order is also final
under R.C. 2505.02(B)(4) because it grants relief in a provisional-remedy proceeding. Community
First Bank & Trust v. Dafoe, 108 Ohio St.3d 472, 2006-Ohio-1503, 844 N.E.2d 825, ¶ 25-26.
554 N.E.2d 134 (8th Dist.1988), citing Ry. Co. v. Jewett, 37 Ohio St. 649 (1882),
paragraph two of the syllabus.
{¶11} Further, the language of the receivership statute implies that the court may
only appoint a receiver following a hearing and the receipt of evidence justifying the
appointment. Real Estate Capital Corp. v. Thunder Corp., 31 Ohio Misc. 169, 287
N.E.2d 838 (C.P.1972); R.C. 2735.01. R.C. 2735.01(A) provides that the court may
appoint a receiver “when it is shown that the property or fund is in danger of being lost,
removed, or materially injured.” (Emphasis added.) Similarly, R.C. 2735.01(B) provides
that the court may appoint a receiver in a foreclosure action “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.” (Emphasis added.) The legislature did not
use the words “alleged,” “plead,” or “averred,” which would indicate that the legislature
intended the appointment of receivers without the presentation of evidence. Therefore, the
appointment of a receiver without a hearing and supportive evidence is generally illegal
and invalid. Real Estate Capital Corp., supra.
{¶12} However, the general rule requiring notice is not inflexible. The court may
appoint a receiver without notice if the facts and situation warrant such an appointment.
Mfr.’s Life Ins., supra. For example, a provision in a mortgage agreement whereby the
mortgagor waives his or her entitlement to notice of the appointment of a receiver for the
mortgaged property is valid and enforceable. Id. at syllabus.
{¶13} Pursuant to Section 10.1(f), Gotham consented to the immediate
appointment of a receiver without notice upon default. (See Plaintiff’s complaint at Ex.
7, section 10.1(f)). By contractually consenting to the appointment of a receiver, Gotham
waived its right to oppose the appointment of a receiver and the requirements of R.C.
2735.01.
{¶14} Therefore, the trial court did not abuse its discretion by appointing the
receiver without giving Gotham an opportunity to respond to U.S. Bank’s motion and
without a hearing.
The Receiver’s Powers to Lease Property
{¶15} Gotham argues the trial court abused its discretion by authorizing the
receiver to enter into, modify, or reject long-term commercial leases without providing
notice to Gotham and without obtaining court approval.
{¶16} The purpose of a receivership is to conserve property pending an ultimate
disposition of it by the court. A receiver’s role is to “maintain the status quo regarding
the property in controversy and to safeguard said property from being dissipated while the
plaintiff is pursuing its remedy.” In re Gourmet Servs., Inc., 142 B.R. 216, 218
(Bankr.S.D.Ohio 1992) (applying Ohio law). Thus, this court has held that receivers serve
a limited purpose and lack broad discretionary power to reorganize troubled concerns.
Cent. Natl. Bank Savs. & Trust Co. v. Representative Realty Co., 29 Ohio App. 446, 448,
162 N.E. 768 (8th Dist.1928) (holding that Ohio’s receiver statute did not authorize a
receiver to “reorganize [the insolvent business] for the purpose of carrying it on”).
{¶17} Nevertheless, this court has also held that if an order appointing a receiver
does not convey sufficiently broad powers to enable the receiver to best serve the interests
of the receivership estate, the court may enlarge the powers to secure the object of the
receiver’s appointment. Am. Savs. Bank Co. v. Union Trust Co., 10 Ohio L.Abs. 82 (8th
Dist.1931), rev’d on other grounds, 124 Ohio St. 126, 177 N.E. 199 (1931).
{¶18} Furthermore, where a contract provides for the right to a receiver, the parties
may waive the requirements set forth in R.C. 2735.01 et seq. Mfr.’s Life Ins. Co., 51
Ohio App.3d at 101; Metro. Life Ins. Co. v. Triskett Illinois, Inc., 97 Ohio App.3d 228,
236, 646 N.E.2d 528 (1st Dist.1994). A court will enforce the terms of a contract if the
written language is clear and unambiguous. Myers v. E. Ohio Gas Co., 51 Ohio St.2d
121, 125, 364 N.E.2d 1369 (1977); Saunders v. Mortensen, 101 Ohio St.3d 86,
2004-Ohio-25, 801 N.E.2d 452. “[W]here a contract is plain and unambiguous, it does
not become ambiguous by reason of the fact that its operation will work a hardship upon
one of the parties thereto and a corresponding advantage to the other * * *.” Dugan &
Meyers Constr. Co., Inc. v. Ohio Dept. of Adm. Servs., 113 Ohio St.3d 226,
2007-Ohio-1687, 864 N.E.2d 68, ¶ 29.
{¶19} Gotham contends the trial court abused its discretion when it authorized the
receiver to enter into, modify, or reject long-term leases without providing notice to
Gotham and without obtaining court approval because such powers are contrary to law.
However, pursuant to the terms of the parties’ loan documents, Gotham absolutely
assigned the leases and rents to U.S. Bank and previously retained a license to utilize the
leases and rents. The license terminated automatically upon default, and Gotham lost
any interest it had in the leases and rents at the Property. Section 3.1 of the Assignment
of Rents provides, in pertinent part:
In addition, Lender may, at its option, without waiving such Default,
without notice and without regard to the adequacy of the security of the
Debt, either in person or by agent, nominee or attorney, with or without
bringing any action or proceedings, or by a receiver appointed by a court,
dispossess Borrower and its agents and servants from the Property, without
liability for trespass, damages or otherwise and exclude Borrower and its
agents or servants wholly therefrom, and take possession of the Property
and all books, records and accounts relating thereto and have, hold,
manage, lease and operate the Property on such terms and for such period
of time as Lender may deem proper and either with or without taking
possession of the Property. (Emphasis added.)
{¶20} Additionally, paragraph 10.1(g) of the Mortgage provides that upon default,
U.S. Bank may
enter into or upon the Property * * * Lender may exercise all rights and
powers of Borrower with respect to the Property including, without
limitation * * * (3) the right to make, cancel, enforce or modify Leases,
obtain and evict tenants, and demand, sue for, collect and receive all rents
of the Property and every part thereof. (Emphasis added.)
{¶21} Therefore, pursuant to the terms of the loan documents, Gotham absolutely
assigned the leases and rents to U.S. Bank, and its license in the rents and leases
automatically terminated upon default. Without any interest in the rents and leases,
Gotham is not entitled to notice of any changes to the leases. Therefore, pursuant to
Section 3.1 of the Assignment of Rents, the receiver is entitled to lease and operate the
Property without court approval and without notice to Gotham.
Advancements for Preservation of the Property
{¶22} Gotham also argues the trial court erred by authorizing the receiver to
borrow limitless amounts of money without notice to Gotham or court approval.
Although the trial court’s order does not specify a monetary limit on borrowing, pursuant
to Section 15 of the court’s order, the noteholder is only permitted to make advancements
for expenses that are necessary for the preservation of receivership property. Therefore,
these expenses constitute administrative expenses of the receivership and are not without
limits.
{¶23} Further, Gotham contractually agreed that these kinds of expenses constitute
obligations under the loan documents and are secured by the Mortgage. Sections 3(a) of
the Note and Section 2.1 of the Mortgage both state that U.S. Bank’s lien secures “all
sums advanced pursuant to this Security Instrument to protect and preserve the Property
and the lien and the security interest created hereby.” Paragraph 15 of the Receiver
Order states that such advancements “shall constitute obligations of the Defendant under
the loan documents.” Thus, because the provisions of the trial court’s judgment
concerning advancements comport with the terms of the loan documents, the trial court
did not abuse its discretion by authorizing the receiver to borrow money when necessary
to preserve the receivership property.
Repairs and Operations
{¶24} Gotham argues the trial court abused its discretion by authorizing the
receiver to expend substantial funds to construct tenant improvements, make property
repairs, and purchase materials, supplies, and services. It contends that the court’s
judgment is contrary to the Supreme Court’s holding in Am. Savs. Bank Co., 124 Ohio St.
126, 177 N.E. 199 (1931).
{¶25} However, Union Trust decided whether the receiver could obtain an
advancement from a lender when there was no language in the receiver order authorizing
such advancements. In this case, the trial court’s order specifically provides for limited
advancements necessary for the preservation of the Property. Paragraphs 5 and 6 of the
court’s receiver order provide that the receiver can construct tenant improvements, make
repairs, and purchase merchandise, materials, supplies, and services at the Property in an
amount not to exceed $7,500 without consent from U.S. Bank or further order of the
court.
{¶26} 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. Moreover, as previously explained, Gotham contractually agreed that a receiver
would be immediately appointed over the property to operate the property in the event of
default. Therefore, we find no abuse of discretion in the court’s decision authorizing the
receiver to expend funds to construct tenant improvements, make property repairs, and
purchase materials, supplies, and services for the preservation of the Property.
Pre-judgment Power of Sale
{¶27} Gotham argues the trial court abused its discretion by granting the receiver a
pre-judgment power of sale in violation of Gotham’s due process rights. Gotham asserts
that allowing the receiver to sell the property before a final judgment in foreclosure
improperly circumvents the due process protections afforded to Gotham in the foreclosure
proceedings.
{¶28} Although the trial court’s receivership order permits pre-judgment sales of
receivership property, Gotham ignores the trial court’s mandate that requires the receiver
to first obtain court approval before selling any property. 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.
{¶29} Moreover, this court has previously allowed receivers to sell property
through receiver sales. Huntington Natl. Bank v. Motel 4 BAPS, Inc., 191 Ohio App.3d
90, 2010-Ohio-5792, 944 N.E.2d 1210 (8th Dist.); Huntington Bank L.L.C. v. Prospect
Park L.L.C., 8th Dist. No. 97720, 2012-Ohio-3261. Therefore, the provision authorizing
the sale of receivership property with court approval was not contrary to law, and the trial
court did not abuse its discretion by permitting a pre-judgment sale of property with prior
court approval.
Court’s Duty to Supervise Receiver
{¶30} Finally, Gotham argues the trial court abused its discretion by improperly
delegating its duty to supervise the receiver to U.S. Bank. It contends the court
erroneously granted the receiver unfettered powers without sufficient judicial oversight.
{¶31} In a receivership, the court and the receiver, who is an agent of the court,
administer the assets of the receivership estate for the benefit of all interested persons.
INF Ent., Inc. v. Donnellon, 133 Ohio App.3d 787, 729 N.E.2d 1221 (1st Dist.1999).
The appointing court defines the receiver’s powers and therefore controls his actions.
McGinness v. U.S., I.R.S., 90 F.3d 143, 1996 FED App. 0223P (6th Cir.1996).
{¶32} Here, the trial court’s receiver order required that the receiver keep the trial
court informed of the state of the receivership estate and the various developments
occurring at the Property for the duration of the receivership. The receiver order also
required that the trial court approve certain actions, such as compensation and the sale of
any receivership property, before such actions are undertaken. Although some
provisions necessitate only approval by the noteholder, these provisions correspond with
the noteholder’s rights under the loan documents as previously agreed to by Gotham.
Therefore, the trial court did not delegate its duty to monitor the receivership.
{¶33} The sole assignment of error is overruled.
{¶34} Judgment affirmed.
It is ordered that appellees recover from appellant costs herein taxed.
The court finds there were reasonable grounds for this appeal.
It is ordered that a special mandate be sent to the common pleas court to carry this
judgment into execution.
A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of
the Rules of Appellate Procedure.
EILEEN T. GALLAGHER, JUDGE
KATHLEEN ANN KEOUGH, P.J., and
TIM McCORMACK, J., CONCUR