Ohio's Substitute House Bill 138, which revises many of the procedures in foreclosure actions, became effective on Sept. 11. The bill originated in response to complaints by cities that purchasers of properties at foreclosure sales were delaying the recording of the sheriff's deed, making it difficult for the cities to determine to whom notices should be served with regard to building code violations.
Hence, the original primary purpose of the bill was to authorize and require the sheriffs personally to submit the deeds for recording promptly after the bidder pays the balance due.
Various groups involved in the foreclosure process lobbied for a number of amendments, resulting in a 30-page bill by the time it was passed.
This author met with the chief sponsor of the bill and testified at the Ohio Senate's Civil Justice Committee hearing, in order to propound some new ideas to change Ohio's laws regarding, among other things, lis pendens and publication requirements, which will shorten the timeline and reduce the costs for foreclosures. The bill as passed includes significant improvements from the lenders' standpoint, but it also presents a couple of potential headaches.
Under the prior law, lis pendens did not take effect until service of the summons was complete. Frequently, new liens were filed after a foreclosure was commenced but before service was complete, requiring the complaint to be amended to add the new lien holders as parties to the case. This caused the case to be delayed until service was completed on the new lien holders and their answer periods expired.
Under the new law, lis pendens will take effect as of the date the complaint is filed. This change in the law will bring about a significant reduction in the timeline, as amended complaints will be necessary much less frequently.
Under the prior law, each county decided for itself whether to require evidence of title to be filed in the case and what form of title evidence would be required. The new law imposes a standardized requirement that a "preliminary judicial report," which is a guarantee of title issued by a licensed title insurance agent, must be filed within 14 days after the complaint is filed, and must have an effective date not more than 30 days prior to the complaint.
The only exception relates to commercial property foreclosures, in which either a preliminary judicial report or a title commitment can be filed.
Service of summons by publication has always been authorized for defendants whose whereabouts are unknown. Publication was previously to be made once a week for six weeks. The new law reduces this requirement for foreclosures to once a week for three weeks.
In addition, if the property has a street address and a permanent parcel number, it will no longer be necessary to include the complete legal description in the publication. By reducing both the number and size of the publications, the timeline in cases where service of the summons is perfected by publication will be reduced by three weeks, and hundreds of dollars in publication costs should be saved.
The sheriff is now authorized to conduct open houses to show vacant properties prior to the sheriff's sale. This idea was conceived by one of the state senators as a device to attract additional bidders for the sheriff's sale. However, because almost all sheriffs departments are overworked and understaffed, it is unlikely that many sheriffs will actually conduct any open houses.
The sheriff's advertisement of the sale is to be published for at least three weeks prior to the sale, rather than beginning 30 days prior to the sale under the prior law. This will reduce the time frame by nine days in many cases.
The successful bidder, including lienholders, must provide the sheriff with information regarding the purchaser, including the name, address, and phone number of a contact person. Presumably, this information can be used by the city in order to discuss or serve notices of building code violations.
Purchasers are generally required to pay a deposit at the time of the sale. Previously, first lien holders could obtain a waiver and were not required to make any payment at the time of the sale.
However, the new law appears to require the sheriff to collect at the time of the sale, the amount of the recording and conveyance fees, and associated costs to cover the recording of the deed. Therefore, unless the sheriffs interpret the law differently, first lienholders must become accustomed to providing the required funds to their attorneys when required for the sale.
An amendment has already been suggested in order to alleviate this requirement for lienholders.
Confirmation of sale
The new law requires the court to enter the order confirming the sale within 30 days after the sale. The law does not state – and, therefore, it remains to be determined – what the consequence will be if the court fails to enter the order confirming the sale within that time frame.
The balance due on the purchase price must be paid within 30 days after confirmation of the sale, or the purchaser will be found in contempt of court. There is no exception for purchasers who are lienholders.
Therefore, lienholders who purchase property at a sheriff's sale must take this requirement seriously, and they must deliver to their attorney the balance due to complete the sale so that the attorney can deliver it to the sheriff prior to the 30-day deadline.
Under the prior law, in most counties, the sheriff's departments prepared the sheriff's deed and issued it to the purchaser. Under the new law, the foreclosure attorney is to prepare the sheriff's deed and deliver it to the sheriff for execution no later than seven days after the court enters the order confirming the sale.
Eliminating the duty to prepare the deed from the sheriffs will eliminate many delays due to overworked sheriffs departments and, in turn, will eliminate frequent errors on the deeds that are prepared by sheriffs. The sheriff is to record the deed within 14 days after payment of the balance due to complete the sale.
Previously, Ohio was a "one deed" state for conveyances to the U.S. Department of Housing and Urban Development (HUD). The bid could be assigned from the investor to HUD, and the sheriff's deed could convey title directly to HUD. The foreclosure attorney would hold the unrecorded sheriff's deed until the servicer provided instructions to record the conveyance, and the attorney would then submit the sheriff's deed for recording.
Under the new law, Ohio became a two-deed state. Because the law requires the sheriff to submit the sheriff's deed for recording, it will no longer be possible for the foreclosure attorney to hold the unrecorded sheriff's deed until the property is in a conveyable condition to HUD.
Therefore, the bid will be in the name of the investor and will not be assigned to HUD. The sheriff will record the deed to the investor promptly, and it will be necessary for a second deed – from the investor to HUD – to be executed on behalf of the investor and recorded after the property is in a conveyable condition.
Deeds to HUD are exempt from the conveyance fee (transfer tax) to the county at the time of the recording of the deed. The sheriff's deed to the investor will not be exempt from the conveyance fee, although the deed from the investor to HUD will be exempt. The conveyance fee, which must be paid upon recording the sheriff's deed to the investor, varies from county to county between 0.1% and 0.4% of the purchase price.
Taxes are to be paid from the proceeds of the sheriff's sale for any unpaid prior year's taxes, including penalties and interest, as well as taxes for the current year, which accrued prior to confirmation of the sale, even if not yet assessed. The treasurer is to provide an estimated amount for this purpose, and the sheriff is to refund any excess after the actual amount is determined.
Larry Rothenberg is a partner managing the foreclosure/evictions department of the Cleveland office of Weltman, Weinberg & Reis Co. LPA. He is the author of the Ohio Jurisdictional Section contained in the treatise "Dunaway, The Law of Distressed Real Estate," and can be reached at (216) 685-1135 or via e-mail at firstname.lastname@example.org.