Receiverships have traditionally been used by creditors to manage and/or liquidate assets of business debtors. However, the use of receiverships in nuisance actions against owners of residential or mixed-use properties is on the rise in housing and environmental courts throughout Ohio. This trend is cause for concern to lenders and servicers because receivers have the ability to sell properties free and clear of liens. Additionally, receiverships often result in substantial monetary losses to interest holders of record.
Most nuisance actions begin when a city prosecutor files a complaint and makes a request for an injunction in housing or environmental court. However, any interested party is able to file a nuisance complaint, including neighbors, non-profits, townships, and tenants. In this respect, the caption of a complaint may appear to be a simple suit between two private individuals and as a result may not be appropriately evaluated or otherwise promptly routed to counsel for review.
A nuisance property is very broadly defined as a building that is a “menace” to public health, welfare, or safety. Once a property is declared a public a nuisance by the court, Ohio law permits a receiver to be appointed to abate the nuisance, which typically results in the property being rehabilitated, and if not redeemed, sold to a new owner free of all interests.
In addition to potential lien stripping, the administrative expenses of the receivership become the first and best lien on the property upon abatement of the nuisance by the receiver. Administrative expenses include the receiver’s fees and expenses, attorney fees, carrying costs, and rehabilitation expenses. These expenses can substantially reduce funds available for further distribution to interest holders if the property is sold either by auction or by private sale. Moreover, as residential property receiverships often result in a private sale, receivers may undertake a much more comprehensive rehabilitation plan than is necessarily required to cure the original nuisance violations.
Mortgagees, lienholders, or others holding an interest in the nuisance property may oppose a receiver’s appointment. However, to oppose the appointment successfully, the party would be required to present to the court its own viable financial and construction plan to rehabilitate the property. If an interested party’s plan is approved and it undertakes remediation, its administrative expenditures would become the first and best lien on the property.
Best practices dictate that lenders and servicers promptly seek the assistance of counsel to review nuisance complaint filings and to develop a comprehensive strategy as early as practicable. Early intervention with the prosecutor and the court will ensure that the widest array of options remain available. If a receiver is ultimately appointed, counsel remains necessary to scrutinize the receiver’s actions and maximize recovery.