Castlebrook, Limited v. Dayton Properties Limited Partnership, 92-LW-0552

• Decision Date: 01 February 1992
• Docket Number: 12776,92-LW-0552
• Parties: CASTLEBROOK, LIMITED, Plaintiff-Appellee v. DAYTON PROPERTIES LIMITED PARTNERSHIP, ET AL., Defendant-Appellant CASE (T.C. NO. 90-995)
• Court: Ohio Court of Appeals

CASTLEBROOK, LIMITED, Plaintiff-Appellee v. DAYTON PROPERTIES LIMITED PARTNERSHIP, ET AL Defendant-Appellant (T.C. NO. 90-995)

No. 12776

92-LW-0552 (2nd)

Court of Appeals of Ohio, Second District, Montgomery County

FEBRUARY 20, 1992

Presented for oral argument on the 13th day of January, 1992.

OPINION

WALTER REYNOLDS, 2100 FIRST NATIONAL PLAZA, DAYTON, OHIO 45402 Attorney for Plaintiff-Appellee

LAWRENCE T. BURICK, P O BOX 8801, DAYTON, OH 45401 Attorney for Defendant-Appellant

FAIN P.J.

In this foreclosure action, Defendant-Appellant Dayton Properties Limited Partnership (DPLP) appeals from the order of the Montgomery County Court of Common Pleas granting the motion of Raymond C. Frye, as court-appointed Receiver of the mortgaged property, for leave to file a proof of claim against DPLP in its Chapter 11 Bankruptcy proceedings and to commence a lawsuit against the general partners of DPLP to recover tenant security deposits received by Castlebrook prior to the appointment of the Receiver.

DPLP contends that:(1) the trial court exceeded its authority in authorizing Frye to undertake these actions because tenants' security deposits are not part of the property in this receivership and were not the subject of the mortgage; and (2) Frye cannot pursue the general partners of DPLP until: (a) all DPLP assets are exhausted; and (b) the claims for the return of the security deposits are ripe. Because we conclude that the trial court erred as a matter of law in authorizing the receiver to take action that was not respecting the property that was the subject of the foreclosure action and, therefore, from which no creditor of that property could benefit, we reverse the order of the trial court.

DPLP gave a non-recourse mortgage on certain real property including the Castlebrook Apartments in Montgomery County to secure a note to Castlebrook and assumed Castlebrook's prior obligation on a note from Castlebrook to The Mutual Life Insurance of New York (MONY) that was secured by a first mortgage on the property. The CastlebroOk mortgage covers the real property and certain fixtures on it and also contains an assignment of the rents, profits, and issues of the property to Castlebrook. DPLP defaulted in its payments to MONY and to Castlebrook, and on March 1, 1990, Castlebrook brought suit to foreclose the mortgage and determine priority of liens.

Castlebrook, pursuant to paragraph 10 of the mortgage, moved for the appointment of a receiver to collect the rents and manage the property, and the court granted the motion. The receivership was vacated and reinstated twice, once pursuant to agreement between Castlebrook and DPLP, and once after a general partner of DPLP filed an involuntary Chapter 11 bankruptcy petition against the partnership in the U.S District Court for the District of Massachusetts. Castlebrook obtained Relief from Stay from the Bankruptcy Court "for all purposes with respect to Castlebrook's interests in the property of the estate of debtor Dayton Properties Limited Partnership, including the property known as Castlebrook Apartments, in Madison Township, Montgomery County, Ohio." (Emphasis added.)

Frye subsequently discovered a deficiency of approximately $50,000 in DPLP's tenant security deposit account and moved for authority to pursue the partnership and the partners to recover the deficiency. In his motion, he alleged that these tenant security deposits were assets of the estate and should have been held in trust for the payment of damages caused by tenants or to refund to the tenants when they vacated the premises.

The trial court granted the motion, and the same day entered judgment against DPLP On the foreclosure claim but left open cross-claims by other defendants against DPLP. ^[1] DPLP appeals from the order authorizing Frye to proceed against DPLP and its general partners.

II

We raised the question during oral argument whether the order appealed from is a final appealable order. Both parties have asserted that the order appealed from is a final appealable order, and we agree.

The order appointing the receiver and authorizing him to take certain action is "an order that affects a substantial right made in a special proceeding or upon a summary application in an action after judgment" for purposes of R.C. 2505.02. Receivers' powers cannot be attacked collaterally but only in a direct appeal, Grant v A.B. Leach (1930), 280 U.S. 351, 359, 50 S.ct. 107, 110. Therefore, the only opportunity to question the order is in this direct appeal from the order, and this court has jurisdiction to determine the issues.

III

DPLP's sole Assignment of Error is as follows:

THE TRIAL COURT ERRED IN SUSTAINING THE RECEIVER'S MOTION SEEKING AN ORDER FOR LEAVE TO FILE A PROOF OF CLAIM, BRING A LAWSUIT AND EMPLOY COUNSEL.

In addition to this Assignment of Error, DPLP also assigns three sub-Assignments of Error as follows:

THE TRIAL COURT ERRED AND ACTED WITHOUT AUTHORITY WHEN IT AUTHORIZED THE RECEIVER TO ASSERT CLAIMS AGAINST DPLP AND ITS GENERAL PARTNERS FOR THE RETURN OF THE SECURITY DEPOSITS COLLECTED PRIOR TO THE RECEIVER'S APPOINTMENT SINCE THESE SECURITY DEPOSITS WERE NOT PART OF THE REAL PROPERTY AND WERE NOT SUBJECT TO THE CASTLEBROOK MORTGAGE.

THE TRIAL COURT ERRED WHEN IT PERMITTED THE RECEIVER TO ASSERT CLAIMS AGAINST THE DPLP GENERAL PARTNERS BECAUSE THE RECEIVER DID NOT PLEAD THAT THERE WERE INSUFFICIENT PARTNERSHIP ASSETS TO SATISFY THE CLAIMS.

THE TRIAL COURT ERRED IN ALLOWING THE RECEIVER TO ASSERT CLAIMS AGAINST THE DPLP & P BECAUSE THESE CLAIMS WERE NOT RIPE.

DPLP argues that the receiver in a foreclosure action is a special, limited receiver who may act only with respect to the real property or other assets that are the subject of the mortgage that is being foreclosed. DPLP argues further that the tenants' security deposits are not part of the mortgage and do not run with the land; therefore, they argue, it is either an error of law or an abuse of discretion for the court to authorize the receiver to pursue those funds against either the partnership or its general partners, since that action is not authorized by law.

Frye argues that because the court had authority to appoint a receiver it was not an abuse of discretion to authorize him to attempt to collect the security deposits, and that this is not the appropriate forum to determine whether he would prevail on his claims.

A. Standard of Review

The first question to address is whether the proper standard of review is abuse of discretion or error of law. "Abuse of discretion" has been defined by the Ohio Supreme Court as an attitude that is unreasonable, arbitrary or unconscionable. Huffman v. Hair Surgeon, Inc. (1985), 19 Ohio St.3d 83, 87, 19 OBR 123, 126, 482 N.E.2d 1248, 1252. The abuse of discretion standard should be used when the trial court makes discretionary decisions based on such things, for example, as evaluating the credibility of witnesses, Seasons Coal Co. v. Cleveland (1984), 10 Ohio St. 3d 77, 80, 10 OBR 408, 410, 461 N.E.2d 1273, 1276; ruling on the admission of evidence; making factual determinations, AAAA Enterprises v. River Place (1990), 50 Ohio St. 3d 157, 161; and whether to appoint a receiver, State ex rel. Celebrezze v. Gibbs (1991), 60 Ohio St. 3d 69.

However, where a trial court's order is based on an erroneous standard or a misconstruction of the law, it is not appropriate for a reviewing court to use an abuse of discretion standard. In determining a pure question of law, an appellate court may properly substitute its judgment for that of the trial court, since an important function of appellate courts is to resolve disputed propositions of law.

Confusion has been engendered by an unfortunate choice of words when courts have said on occasion that an abuse of discretion connotes "more than an error of law." It would be more accurate to say that an abuse of discretion is "different from an error of law.1 A trial court's purely legal determination will not be given the deference that is properly accorded to the trial court with regard to those determinations that are within its discretion.

In the case before us, a threshold issue of law is whether a trial court may authorize a receiver to take the action that this receiver has been authorized to take. If the answer to that question is in the negative, then there would be no discretion for the trial court properly to exercise, and the purported authorization of the receiver would be erroneous as a matter of law. If, on the other hand, the answer to the threshold question is in the affirmative,then the issue would become whether the trial court, under the circumstances in which it did so, was within its discretion in authorizing the receiver to take the action, or whether it was an abuse of discretion to do so. Under the circumstances of this case, the issue would become whether there is a sufficiently reasonable chance that the receiver would be successful in taking the authorized action in the bankruptcy or against the general partners. If so, then the authority vested in the receiver would be reasonable, and not an abuse of discretion. If not, then the authority vested in the receiver would be unreasonable, as a waste of scarce resources, and it would constitute an abuse of discretion.

B. Authority of Receiver

A trial court generally has authority to appoint, a receiver in a mortgage foreclosure action. R.C. § 2735.01 provides that a receiver may be appointed in a mortgage foreclosure action:

§ 2735.01 Appointment of Receiver. (GC § 11894)

A receiver may be appointed by *** the court of common pleas or a judge thereof *** in the following cases:

***

(B) In an action by a mortgagee, for the foreclosure of his mortgage and sale of the

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